An Estimated Dynamic Stochastic General Equilibrium Model with Financial Frictions for Estonia

Paolo Gelain and Dmitry Kulikov

Eastern European Economics, 2011, vol. 49, issue 5, 97-120

Abstract: In this paper we estimate an extended version of the previously estimated small open economy dynamic stochastic general equilibrium model for Estonia (Gelain and Kulikov 2009). Here we introduce financial frictions, in the form of the so-called financial accelerator. Our main findings are: (1) financial frictions improve the ability of the model to fit the data; (2) the financial shock is relevant in explaining the variance of the macroeconomic variables; (3) impulse response functions describe the expected amplification of shocks, except for some of them (e.g., the technology shock); and (4) all of the nominal and real rigidities are important for obtaining a better fit of the model, with the exception of real wages.

Date: 2011
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