Financial intermediation, investment dynamics and business cycle fluctuations

Andrea Ajello

MPRA Paper from University Library of Munich, Germany

Abstract: How important are financial friction shocks in business cycles fluctuations? To answer this question, I use micro data to quantify key features of US financial markets. I then construct a dynamic equilibrium model that is consistent with these features and fit the model to business cycle data using Bayesian methods. In my micro data analysis, I establish facts that may be of independent interest. For example, I find that a substantial 33% of firm investment is funded using financial markets. The dynamic model introduces price and wage rigidities and a financial intermediation shock into Kiyotaki and Moore (2008). According to the estimated model, the financial intermediation shock explains around 40% of GDP and 55% of investment volatility. The estimation assigns such a large role to the financial shock for two reasons: (i) the shock is closely related to the interest rate spread, and this spread is strongly countercyclical and (ii) according to the model, the response in consumption, investment, employment and asset prices to a financial shock resembles the behavior of these variables over the business cycle.

Keywords: DSGE model; Bayesian estimation; Financial frictions; Financial Shocks; Great Recession (search for similar items in EconPapers)
JEL-codes: B22 C68 D53 E44 G01 (search for similar items in EconPapers)
Date: 2010-11, Revised 2011-03
New Economics Papers: this item is included in nep-bec and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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https://mpra.ub.uni-muenchen.de/32447/1/MPRA_paper_32447.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/35250/3/MPRA_paper_35250.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/35250/2/Paper_v8.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/35250/4/Paper_v8.pdf revised version (application/pdf)

Related works:
Journal Article: Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations (2016)
Working Paper: Financial intermediation, investment dynamics and business cycle fluctuations (2012)
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