Financial Frictions and the Transmission of Foreign Shocks in Chile

Javier García-Cicco, Markus Kirchner and Santiago Justel ()
Authors registered in the RePEc Author Service: Javier Garcia Cicco

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We set up and estimate a DSGE model of a small open economy to assess the role of domestic financial frictions in propagating foreign shocks. In particular, the model features two types of financial frictions: one in the relationship between depositors and banks (following Gertler and Karadi, 2011) and the other between banks and borrowers (along the lines of Bernanke et al, 1999). We use Chilean data to estimate the model, following a Bayesian approach. We find that the presence of financial frictions increases the importance of foreign shocks in explaining consumption, inflation, the policy rate, the real exchange rate and the trade balance. In contrast, under financial frictions the role of these foreign shocks in explaining output and investment is somehow reduced. The behavior of the real exchange rate and its interaction with the financial frictions is key to understand the results.

Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lam, nep-mac, nep-mon, nep-opm and nep-sog
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:722

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