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Financial intermediaries in an estimated DSGE model for the United Kingdom

Stefania Villa () and Jing Yang ()

No 431, Bank of England working papers from Bank of England

Abstract: Gertler and Karadi combined financial intermediation and credit policy in a DSGE framework. We estimate their model with UK data using Bayesian techniques. To validate the fit, we evaluate the model’s empirical properties. Then we analyse the transmission mechanism of the shocks, set to produce a downturn. Finally, we examine the empirical importance of nominal, real and financial frictions and of different shocks. We find that banking friction seems to play an important role in explaining the UK business cycle. Moreover, the banking sector shock seems to explain about half of the fall in real GDP in the recent crisis. A credit supply shock seems to account for most of the weakness in bank lending.

Keywords: Financial friction; DSGE; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-dge
Date: 2011-07-13
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0431

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