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Title:Financial frictions, financial shocks, and aggregate volatility PDF Logo
Authors:Fuentes-Albero, Cristina
Issue Date:2012
Series/Report no.:Working Papers, Department of Economics, Rutgers, the State University of New Jersey 2012,01
Abstract:The two main empirical regularities regarding US postwar nominal and real business cycles are the Great Inflation and the Great Moderation. While the volatility of financial price variables also follows such pattern, financial quantity variables have experienced a continuous immoderation. We examine these patterns in volatility by estimating a DSGE model with financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework. We conclude that (i ) while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better financial institutions; (ii ) financial shocks are the main drivers of financial variables, investment, and the nominal interest rate and play a secondary role as drivers of consumption, output, inflation, and hours worked; (iii ) investment-specific technology shocks play an almost negligible role as drivers of the US business cycle.
Subjects:financial frictions
financial shocks
structural break
Great Moderation
Great Inflation
JEL:E32
E44
C11
Document Type:Working Paper
Appears in Collections:Working Papers, Department of Economics, Rutgers University

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