U.S. business cycles, monetary policy and the external finance premium

Enrique Martínez García ()

No 160, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: I investigate a model of the U.S. economy with nominal rigidities and a financial accelerator mechanism la Bernanke et al. (1999). I calculate total factor productivity and monetary policy deviations for the U.S. and quantitatively explore the ability of the model to account for the cyclical patterns of GDP (excluding government), investment, consumption, the share of hours worked, inflation and the quarterly interest rate spread between the Baa corporate bond yield and the 20-year Treasury bill rate during the Great Moderation. I show that the magnitude and cyclicality of the external finance premium depend nonlinearly on the degree of price stickiness (or lack thereof) in the Bernanke et al. (1999) model and on the specification of both the target Taylor (1993) rate for policy and the exogenous monetary shock process.> ; The strong countercyclicality of the external finance premium induces substitution away from consumption and into investment in periods where output grows above its long-run trend as the premium tends to fall below its steady state and financing investment becomes temporarily cheaper. The less frequently prices change in this environment, the more accentuated the fluctuations of the external finance premium are and the more dominant they become on the dynamics of investment, hours worked and output. However, these features?the countercyclicality and large volatility of the spread?are counterfactual and appear to be a key impediment limiting the ability of the model to account for the U.S. data over the Great Moderation period.

JEL-codes: E52 E58 G18 G28 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2013
New Economics Papers: this item is included in nep-mac and nep-mon
Note: Published as: Martínez-García, Enrique (2014), "U.S. Business Cycles, Monetary Policy and the External Finance Premium," in Advances in Non-linear Economic Modeling: Theory and Applications, ed. Frauke Schleer-van Gellecom (Berlin: Springer), 41-114.
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Chapter: U.S. Business Cycles, Monetary Policy and the External Finance Premium (2014)
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