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Turning It Up To Eleven: Re-Evaluating the Role of Financial Frictions in the 2007–2008 Economic Crisis

Zamid Aligishiev (), Michael Ben-Gad (), Andrew Mountford () and Joseph Pearlman ()

Working Papers from Department of Economics, City University London

Abstract: We analyze the role of public and private financial frictions in the 2007–2008 economic crisis in the United States by extending the model of Drautzburg and Uhlig (2015) to eleven observable variables using data on all three interest rates in the model (policy, private and public). We also include a preference shock in the model, and present an alternative method for describing shock decompositions during and preceding the crisis designed to isolate the impact of the pre-crisis shocks. The estimated model produces an intuitive description of the evolution of the postwar U.S. economy overall and of the economic crisis at the end of the sample period. We find, in contrast to Drautzburg and Uhlig, that monetary and fiscal policy shocks played a significant role in mitigating the effects of the financial crisis.

Keywords: DSGE model; Shock decomposition; Financial Frictions; Fiscal Policy (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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