Financial frictions in Latvia

Ginters Buss

Empirical Economics, 2016, vol. 51, issue 2, No 4, 547-575

Abstract: Abstract This paper builds a dynamic stochastic general equilibrium (DSGE) model for Latvia that would be suitable for policy analysis and forecasting purposes at Bank of Latvia. For that purpose, I adapt the DSGE model with financial frictions of Christiano et al. (J Econ Dyn Control 35:1999–2041, 2011. doi: 10.1016/j.jedc.2011.09.005 ) to Latvia’s data, estimate it, and study whether adding the financial frictions block to an otherwise identical (‘baseline’) model is an improvement with respect to several dimensions. The main findings are: (1) The addition of the financial frictions block provides more appealing interpretation for the drivers of economic activity and allows to reinterpret their role; (2) financial frictions played an important part in Latvia’s 2008-recession; (3) the financial frictions model beats both the baseline model and the random walk model in forecasting both CPI inflation and GDP.

Keywords: DSGE model; Financial frictions; Small open economy; Bayesian estimation; Currency union; Forecasting (search for similar items in EconPapers)
JEL-codes: E0 E3 F0 F4 G0 G1 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-015-1014-z

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