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Financial frictions in a DSGE model for Latvia

Ginters Buss ()

No 42, Dynare Working Papers from CEPREMAP

Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model for Latvia that would be suitable for policy analysis and forecasting purposes at Bank of Latvia. For that purpose, I adapt the DSGE model with financial frictions of Christiano, Trabandt and Walentin (2011) to Latvia’s data, estimate it, and study whether adding the financial frictions block to an otherwise identical (‘baseline’) model is an improvement with respect to several dimensions. The main findings are: i) the addition of financial frictions block provides more appealing interpretation for the drivers of economic activity, and allows to reinterpret their role; ii) financial frictions played an important part in Latvia’s 2008-recession; iii) the financial frictions model beats both the baseline model and the random walk model in forecasting both CPI inflation and GDP, and performs roughly the same as a Bayesian structural vector autoregression.

Keywords: DSGE model; financial frictions; small open economy; Bayesian estimation; Currency union (search for similar items in EconPapers)
JEL-codes: E0 E3 F0 F4 G0 G1 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2015-05
New Economics Papers: this item is included in nep-dge, nep-eec and nep-mac
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Working Paper: Financial Frictions in a DSGE Model for Latvia (2014) Downloads
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