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The implications of dynamic financial frictions for DSGE models

Uluc Aysun ()

No 2011-02, Working Papers from University of Central Florida, Department of Economics

Abstract: This paper shows that when financial frictions are modeled dynamically, broader inferences can be drawn from DSGE models. By embedding a partial equilibrium framework of bankruptcy proceedings in a dynamic New Keynesian model I find, for example, that financial liberalization episodes are only effective when the judicial system is efficient. More generally, I find that the model responses to various shocks depend on the duration of bankruptcy and the costs incurred during the bankruptcy process. State-level data supports one prediction of the model; U.S. monetary policy is most effective in states with longer foreclosure proceedings.

Keywords: Foreclosure; DSGE; financial frictions; court efficiency (search for similar items in EconPapers)
JEL-codes: C63 E02 E44 E52 (search for similar items in EconPapers)
Date: 2011-08
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