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What Does Structural Analysis of the External Finance Premium Say About Financial Frictions?

Jelena Zivanovic

Staff Working Papers from Bank of Canada

Abstract: I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks. I confront my empirical evidence with the predictions from financial dynamic stochastic general equilibrium (DSGE) models with respect to the finance premium in order to identify an empirically relevant financial friction. The Bernanke, Gertler and Gilchrist (1999) model generates transmission mechanisms that are favored by the data.

Keywords: Economic models; Financial markets; Recent economic and financial developments (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-09
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-38

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