A time varying DSGE model with financial frictions

Ana Galvão, Liudas Giraitis, George Kapetanios and Katerina Petrova

Journal of Empirical Finance, 2016, vol. 38, issue PB, 690-716

Abstract: We build a time varying DSGE model with financial frictions in order to evaluate changes in the responses of the macroeconomy to financial friction shocks. Using U.S. data, we find that the transmission of the financial friction shock to economic variables, such as output growth, has not changed in the last 30years. The volatility of the financial friction shock, however, has changed, so that output responses to a one-standard deviation of the shock increase twofold in the 2007–2011 period in comparison with the 1985–2006 period. The time varying DSGE model with financial frictions improves the accuracy of forecasts of output growth and inflation during the tranquil period of 2000–2006, while delivering similar performance to the fixed coefficient DSGE model for the 2007–2012 period.

Keywords: DSGE models; Financial frictions; Bayesian methods; Time varying parameters (search for similar items in EconPapers)
JEL-codes: C11 C53 E27 E52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (20)

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Working Paper: A Time Varying DSGE Model with Financial Frictions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:38:y:2016:i:pb:p:690-716

DOI: 10.1016/j.jempfin.2016.02.012

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