The role of financial shocks in business cycles with a liability side financial friction
Economic Modelling, 2017, vol. 64, issue C, 249-269
The paper investigates the role of investment specific technology shock within the particular type of financial friction of Gertler and Karadi (2011) and the impact of direct financial shock into this, such as a net worth shock, using US data. The paper explicitly shows how the bank balance sheet effect of counter cyclical movement of capital price attenuates such investment shocks and the extent depends on the type of financial shocks included in the model. Because of the construction of capital quality shock in such financial friction model, we need to incorporate a direct net worth shock while analysing the role of financial shock. This highlights finance sector as a fundamental source of shocks apart from amplifier of shocks originating in elsewhere of the economy.
Keywords: Financial frictions; Nominal wage stickiness; Investment shock; Financial shocks; DSGE (search for similar items in EconPapers)
JEL-codes: E44 E32 E12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:249-269
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