Financial frictions and stabilisation policies

Saira Tufail and Ather Maqsood Ahmed

Afro-Asian Journal of Finance and Accounting, 2024, vol. 14, issue 1, 43-82

Abstract: This research examines the implications of price and quantity-based financial frictions for the macroeconomic dynamics and effectiveness of stabilisation policies in Pakistan. Price and quantity-based financial frictions are captured through external finance premium and collateral constraint, respectively. Results from calibrating a new Keynesian dynamic stochastic general equilibrium model showed that quantity-based frictions generate strong financial accelerator mechanism and impede the stabilisation through monetary, fiscal and macroprudential policies. The effective management through stabilisation policies requires the rigorous handling of quantitative financial frictions.

Keywords: external finance premium; collateral constraint; financial accelerator mechanism; fiscal policy; macro-prudential policy; monetary policy. (search for similar items in EconPapers)
Date: 2024
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