The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking
Hylton Hollander and Guangling Liu
Authors registered in the RePEc Author Service: Hylton Hollander () and
Guangling Liu ()
No 360, Working Papers from Economic Research Southern Africa
This paper studies the role of the equity price channel in business cycle fluctuations, and highlights its systemic risk across all sectors of the economy. We develop a canonical New-Keynesian dynamic stochastic general equilibrium model with a tractable role for the equity market in banking, entrepreneur and household economic interactions. The model is estimated with Bayesian techniques using U.S. data over the sample period 1982Q01 - 2012Q01. We show that a New-Keynesian DSGE model with an equity price channel well mimics the U.S. business cycle. Moreover, the equity price channel significantly exacerbates business cycle fluctuations through both the financial accelerator and bank funding channels. This study highlights the equity price channel as a different aspect to general equilibrium models with financial frictions, and emphasizes the consequences of the (in)stability of financial markets on the real economy.
Keywords: Equity price channel; asset pricing; financial frictions; bank capital; New-Keynesian; Bayesian (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 E51 G12 (search for similar items in EconPapers)
Pages: 30 pages
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: The equity price channel in a New-Keynesian DSGE model with financial frictions and banking (2016)
Working Paper: The equity price channel in a New-Keynesian DSGE model with financial frictions and banking (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rza:wpaper:360
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