The anatomy of standard DSGE models with financial frictions
Marcin Kolasa () and
Krzysztof Makarski ()
No 80, NBP Working Papers from Narodowy Bank Polski, Economic Research Department
In this paper we compare two standard extensions to the New Keynesian model featuring financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. Our goal is to compare the workings of the two setups. Towards this end, we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we make a thorough analysis of the two frameworks using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to generate hump-shaped impulse responses and, for some important variables, shows moments that are inconsistent with the data by a large margin.
Keywords: financial frictions; DSGE models; business cycle accounting (search for similar items in EconPapers)
JEL-codes: E30 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:80
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