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How Important are Financial Frictions in the United States and the Euro Area?
Author(s) -
Queijo von Heideken Virginia
Publication year - 2009
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2009.01577.x
Subject(s) - dynamic stochastic general equilibrium , economics , financial accelerator , business cycle , inflation (cosmology) , financial market , odds , bayes estimator , variable (mathematics) , finance , monetary economics , bayesian probability , monetary policy , macroeconomics , medicine , physics , logistic regression , artificial intelligence , theoretical physics , computer science , mathematical analysis , mathematics
This paper aims to evaluate whether frictions in credit markets are important for business cycles in the United States and the euro area. I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding such frictions as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When estimating the model using Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favor the model with financial frictions, both in the United States and the euro area. Moreover, financial frictions are larger in the euro area.