Open AccessFinancial Frictions and Macroeconomy During Financial Crises: A Bayesian DSGE Assessment
Author(s) -
Eric Martial Etoundi Atenga,
Maman Hassan Abdo,
Mbodja Mougoué
Publication year - 2021
Publication title -
american business review
Language(s) - English
Resource type - Journals
eISSN - 2689-8810
pISSN - 0743-2348
DOI - 10.37625/abr.24.2.62-99
Subject(s) - dynamic stochastic general equilibrium , variance decomposition of forecast errors , economics , financial accelerator , financial crisis , business cycle , finance , investment (military) , monetary economics , macroeconomics , monetary policy , econometrics , politics , political science , law
The recent global financial crisis and the Eurozone sovereign default have rekindled the debate on the interactions between the real sector and the financial sphere. The present paper provides an assessment of the role of financial frictions on business cycles in Canada, the Euro Area, the U.K., and the U.S. during these recent financial crises using an extension of the DSGE methodology described by Merola (2015). The main goal is to examine whether and the extent to which those crises enhanced the contribution of financial frictions in driving macroeconomic fluctuations. The models’ properties are examined with posteriors distributions, variance decomposition, and historical decomposition. Posteriors distributions show that the role of real shocks in driving macroeconomic fluctuations decrease with the incorporation of financial frictions in the core DSGE model. Variance decomposition shows that financial frictions and financial shocks affect the business cycle through investment. The empirical estimates also suggest that the contribution of financial frictions and financial shocks in driving investment increases during the global financial crisis.