Financial market frictions in a model of the euro area

Peter McAdam () and Giovanni Lombardo

No 1423, Working Paper Series from European Central Bank

Abstract: We build a model of the euro area incorporating financial market frictions at the level of firms and households. Entrepreneurs borrow from financial intermediaries in order to purchase business capital, in the spirit of the "financial accelerator" literature. We also introduce two types of households that differ in their degree of time preference. All households have preferences for housing services. The impatient households are faced with a collateral constraint that is a function of the value of their housing stock. Our aim is to provide a unified framework for policy analysis that emphasizes financial market frictions alongside the more traditional model channels. The model is estimated by Bayesian methods using euro area aggregate data and model properties are illustrated with simulation and conditional variance and historical shock decomposition. JEL Classification: C11, C32, E32, E37

Keywords: bayesian estimation; decompositions; DSGE modeling; euro area; financial frictions; simulation (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-dge and nep-eec
Note: 50336
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Citations: View citations in EconPapers (55)

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Journal Article: Financial market frictions in a model of the Euro area (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121423

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