Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130783
Authors: 
Galvão, Ana Beatriz
Giraitis, Liudas
Kapetanios, George
Petrova, Katerina
Year of Publication: 
2015
Series/Report no.: 
Working Paper, School of Economics and Finance, Queen Mary University of London 769
Abstract: 
We build a time varying DSGE model with financial frictions in order to evaluate changes in the responses of the macroeconomy to financial friction shocks. Using US data, we find that the transmission of the financial friction shock to economic variables, such as output growth, has not changed in the last 30 years. The volatility of the financial friction shock, however, has changed, so that output responses to a one-standard deviation shock increase twofold in the 2007-2011 period in comparison with the 1985-2006 period. The time varying DSGE model with financial frictions improves the accuracy of forecasts of output growth and inflation during the tranquil period of 2000-2006, while delivering similar performance to the fixed coefficient DSGE model for the 2007-2012 period.
Subjects: 
DSGE models
Financial frictions
Local likelihood
Bayesian methods
Time varying parameters
JEL: 
C11
C53
E27
E52
Document Type: 
Working Paper

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