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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.
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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 

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