Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-17T04:24:28.316Z Has data issue: false hasContentIssue false
  • English
  • Français

FINANCIAL FRICTIONS IN THE EURO AREA AND THE UNITED STATES: A BAYESIAN ASSESSMENT

Published online by Cambridge University Press:  21 January 2016

Stefania Villa
Stefania Villa*
Affiliation:
University of Foggia and KU Leuven
*
Address correspondence to: Stefania Villa, University of Foggia, 71100 Foggia, Italy; E-mail: stefania.villa@unifg.it.
Get access Rights & Permissions [Opens in a new window]

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 (SW) [F. Smets and R. Wouters, Shocks and frictions in US business cycles: A Bayesian DSGE approach, American Economic Review 97(3), 586–606 (2007)] model with financial frictions originating in nonfinancial firms and (ii) a SW model with frictions originating in financial intermediaries. The introduction of financial frictions in either way improves the models' fit compared to a standard SW model, and the empirical comparisons reveal that the latter model outperforms the former both in the euro area and in the United States. 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 FrictionsDSGE ModelsBayesian Estimation
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1313 - 1340
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adolfson, M., Laséen, S., Lindé, J., and Villani, M. (2007) Bayesian estimation of an open economy DSGE model with incomplete pass-through. Journal of International Economics 72 (2), 481–511.Google Scholar
Adolfson, M., Laséen, S., Lindé, J., and Villani, M. (2008) Empirical properties of closed-and open-economy DSGE models of the euro area. Macroeconomic Dynamics 12 (S1), 2–19.CrossRefGoogle Scholar
Agénor, P.-R., Bratsiotis, G.J., and Pfajfar, D. (2014) Credit frictions, collateral, and the cyclical behavior of the finance premium. Macroeconomic Dynamics 18 (5), 985–997.Google Scholar
Aliaga-Diaz, R. and Olivero, M. (2011) The cyclicality of price–cost margins in banking: An empirical analysis of its determinants. Economic Inquiry 49 (1), 26–46.Google Scholar
An, S. and Schorfheide, F. (2007) Bayesian analysis of DSGE models. Econometric Reviews 26 (2–4), 113–172.CrossRefGoogle Scholar
Bekiros, S.D. and Paccagnini, A. (2014) Bayesian forecasting with small and medium scale factor-augmented vector autoregressive DSGE models. Computational Statistics and Data Analysis 71, 298–323.Google Scholar
Bekiros, S. and Paccagnini, A. (in press) Macroprudential policy and forecasting using hybrid DSGE models with financial frictions and state space Markov-switching TVP-VARS. Macroeconomic Dynamics.Google Scholar
Bernanke, B., Gertler, M., and Gilchrist, S. (1996) The financial accelerator and the flight to quality. Review of Economics and Statistics 78 (1), 1–15.CrossRefGoogle Scholar
Bernanke, B., Gertler, M., and Gilchrist, S. (1999) The financial accelerator in a quantitative business cycle model. In Taylor, J. and Woodford, M. (eds.), Handbook of Macroeconomics, pp. 1341–1393. Elsevier.CrossRefGoogle Scholar
Brunnermeier, M., Eisenbach, T., and Sannikov, Y. (2012) Macroeconomics with Financial Frictions: A Survey. NBER working papers, 18102.Google Scholar
Carrillo, J. and Poilly, C. (2013) How do financial frictions affect the spending multiplier during a liquidity trap? Review of Economic Dynamics 16 (2), 296–311.Google Scholar
Christensen, I. and Dib, A. (2008) The financial accelerator in an estimated New Keynesian model. Review of Economic Dynamics 11 (1), 155–178.Google Scholar
Christiano, L. and Ikeda, D. (2011) Government Policy, Credit Markets and Economic Activity. NBER working papers, 17142.CrossRefGoogle Scholar
Christiano, L., Motto, R., and Rostagno, M. (2014) Risk shocks. American Economic Review 104 (1), 27–65.CrossRefGoogle Scholar
Christoffel, K., Coenen, G., and Warne, A. (2008) The New Area-Wide Model of the Euro Area: A Micro-founded Open-Economy Model for Forecasting and Policy Analysis. ECB working paper 944.CrossRefGoogle Scholar
Ciccarelli, M., Maddaloni, A., and Peydro, J. (2013) Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy. Mimeo, European Central Bank.Google Scholar
Cogley, T. and Sbordone, A.M. (2008) Trend inflation, indexation, and inflation persistence in the New Keynesian Phillips curve. American Economic Review 98 (5), 2101–2126.CrossRefGoogle Scholar
De Graeve, F. (2008). The external finance premium and the macroeconomy: US post-WWII evidence. Journal of Economic Dynamics and Control 32 (11), 3415–3440.Google Scholar
Del Negro, M., Giannoni, M.P., and Schorfheide, F. (2013) Inflation in the Great Recession and New Keynesian Models. FRBNY staff report 618.Google Scholar
Del Negro, M. and Schorfheide, F. (2013) DSGE model-based forecasting. Handbook of Economic Forecasting 2.Google Scholar
Fagan, G., Henry, J., and Mestre, R. (2005) An Area-Wide Model for the Euro Area. ECB working paper, 42.Google Scholar
Fernández, A. and Gulan, A. (in press) Interest rates, leverage, and business cycles in emerging economies: The role of financial frictions. American Economic Journal–Macroeconomics.Google Scholar
Fernández-Villaverde, J. (2010). The econometrics of DSGE models. SERIEs: Journal of the Spanish Economic Association 1 (1), 3–49.Google Scholar
Gabriel, V., Levine, P., Pearlman, J., and Yang, B. (2011) An Estimated DSGE Model of the Indian Economy. National Institute of Public Finance and Policy working paper, 11/95.Google Scholar
Galí, J., Smets, F., and Wouters, R. (2011) Unemployment in an estimated New Keynesian model. NBER Macroeconomics Annual 26, 329–360.Google Scholar
Gelain, P. (2010) The External Finance Premium in the Euro Area: A Useful Indicator for Monetary Policy? ECB working paper 1171.Google Scholar
Gerali, A., Neri, S., Sessa, L., and Signoretti, F. (2010) Credit and banking in a DSGE model of the euro area. Journal of Money, Credit and Banking 42, 107–141.Google Scholar
Gertler, M. and Karadi, P. (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58 (1), 17–34.Google Scholar
Geweke, J. (1999). Using simulation methods for Bayesian econometric models: Inference, development, and communication. Econometric Reviews 18 (1), 1–26.Google Scholar
Gilchrist, S. and Zakrajšek, E. (2011) Monetary policy and credit supply shocks. IMF Economic Review 59 (2), 195–232.CrossRefGoogle Scholar
Iacoviello, M. and Neri, S. (2010) Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics 2 (2), 125–164.Google Scholar
Jeffreys, H. (1998). Theory of Probability. Oxford, UK: Oxford University Press.CrossRefGoogle Scholar
Kamber, G., Smith, C., and Thoenissen, C. (2012) Financial Frictions and the Role of Investment Specific Technology Shocks in the Business Cycle. CDMA working paper 12/06.CrossRefGoogle Scholar
Kolasa, M., Rubaszek, M., and Skrzypczyński, P. (2012) Putting the New Keynesian DSGE model to the real-time forecasting test. Journal of Money, Credit and Banking 44 (7), 1301–1324.Google Scholar
Meier, A. and Muller, G. (2006) Fleshing out the monetary transmission mechanism: Output composition and the role of financial frictions. Journal of Money, Credit, Banking 38, 1999–2133.Google Scholar
Queijo von Heideken, V. (2009) How important are financial frictions in the United States and the euro area? Scandinavian Journal of Economics 111 (3), 567–596.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1 (5), 1123–1175.Google Scholar
Smets, F. and Wouters, R. (2005) Comparing shocks and frictions in US and euro area business cycles: A Bayesian DSGE approach. Journal of Applied Econometrics 20 (2), 161–183.Google Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586–606.Google Scholar
Stiglitz, J. and Weiss, A. (1981) Credit rationing in markets with imperfect information. American Economic Review 71 (3), 393–410.Google Scholar
Townsend, R. (1979) Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory 21 (2), 265–293.Google Scholar
Villa, S. (2012) Capital utilization and the amplification mechanism. B.E. Journal of Macroeconomics 12 (1).CrossRefGoogle Scholar
Villa, S. (2013) Financial Frictions in the Euro Area: A Bayesian Assessment. ECB working paper 1521.CrossRefGoogle Scholar
Villa, S. and Yang, J. (2011) Financial Intermediaries in an Estimated DSGE Model for the UK. Bank of England working paper 431.Google Scholar