Financial frictions in the Euro Area and the United States: a Bayesian assessment

Stefania Villa

No 1407, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: This paper assesses the empirical relevance of financial frictions in the Euro Area (EA) and the United States (US). It provides a comprehensive set of comparisons between two models: (i) a Smets and Wouters (2007) (SW) model with financial frictions originating in non-financial firms à la Bernanke et al. (1999) (SWBGG); and (ii) a SW model with frictions originating in financial intermediaries, à la Gertler and Karadi (2011) (SWGK). Proved that the introduction of financial frictions in either way improves the models' fit compared to a standard SW model, the empirical comparisons reveal that the SWGK model outperforms the SWBGG model both in the EA and the US. Two main factors explain this result: first, the magnitude of the financial accelerator effect; and second, the role of the investment-specific technology shock in affecting financial variables.

Keywords: Financial frictions; DSGE models; Bayesian estimation. (search for similar items in EconPapers)
JEL-codes: C11 E44 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-dge, nep-eec and nep-mac
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Citations: View citations in EconPapers (16)

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https://eprints.bbk.ac.uk/26602/1/26602.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: FINANCIAL FRICTIONS IN THE EURO AREA AND THE UNITED STATES: A BAYESIAN ASSESSMENT (2016)
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