Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318136 
Authors: 
Year of Publication: 
2014
Series/Report no.: 
BCAM Working Paper No. 1407
Publisher: 
Birkbeck, University of London, Birkbeck Centre for Applied Macroeconomics (BCAM), London
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 (2007) (SW) model with financial frictions originating in non-financial firms à la Bernanke et al. (1999) (SWBGG); and (ii) a SW model with frictions originating in financial intermediaries, à la Gertler and Karadi (2011) (SWGK). Proved that the introduction of financial frictions in either way improves the models' fit compared to a standard SW model, the empirical comparisons reveal that the SWGK model outperforms the SWBGG model both in the EA and the US. 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.
Subjects: 
Financial frictions
DSGE models
Bayesian estimation
JEL: 
C11
E44
Document Type: 
Working Paper

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