Financial Frictions in Data: Evidence and Impact

Marzie Taheri Sanjani

No 2014/238, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates financial frictions in US postwar data to understand the interaction between the real business cycle and the credit market. A Bayesian estimation technique is used to estimate a large Vector Autoregression and New Keynesian models demonstrating how financial shocks can have a large and sluggish impact on the economy. I identify the default risk and the maturity mismatch channels of monetary policy transmission; I further employ a generalized-IRF to establish countercyclicality of risk spreads; and I show that the maturity mismatch shocks produce a stronger impact than the default risk shocks.

Keywords: WP; default risk; monetary policy shock; contractionary monetary policy; VAR model; Financial Frictions; Bayesian VAR; External Financing Premium; Liquidity risk; Financial shocks; Generalized IRF; DSGE; corporate bond bond yield; risk channel; monetary policy transmission; maturity mismatch risk; expansionary monetary policy shock; modelsempirical Vector Auto Regression; default risk channel; Debt default; Credit; Vector autoregression; Bond yields (search for similar items in EconPapers)
Pages: 33
Date: 2014-12-24
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Citations: View citations in EconPapers (1)

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