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Financial factors in economic fluctuations

Lawrence Christiano (), Roberto Motto and Massimo Rostagno ()

No 1192, Working Paper Series from European Central Bank

Abstract: We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force. JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3

Keywords: bayesian estimation; DSGE model; financial frictions; financial shocks; Funding channel; Lending channel (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
Date: 2010-05
Note: 364643
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Working Paper: Financial Factors in Economic Fluctuations (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101192

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