Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81865
Authors: 
Christiano, Lawrence J.
Trabandt, Mathias
Walentin, Karl
Year of Publication: 
2007
Series/Report no.: 
Sveriges Riksbank Working Paper Series 214
Abstract: 
Which are the main frictions and driving forces of business cycle dynamics in a small open economy? To answer this question we extend what is becoming the standard new Keynesian model in three dimensions. First, we incorporate frictions in the financing of the capital stock. Second, we model employment frictions in the labor market using a search and matching framework, allowing for endogenous job separations. Third, we extend the model into a small open economy setting. We estimate the model using Bayesian techniques on Swedish data. Our main results are: i) A financial shock to entrepreneurial wealth is pivotal for explaining business cycle fluctuations accounting for substantial amounts of the variance in investment and GDP. ii) The marginal efficiency of investment shock has very limited importance when we match financial market data. iii) Our model does not need any high frequency wage markup shocks to match the data. Furthermore, the labor supply shock is unimportant in explaining GDP. iv) The data indicates that there are costs of hiring, but no costs of vacancy postings per se.
Subjects: 
DSGE model
financial frictions
labor market frictions
unemployment
small open economy
Bayesian estimation
JEL: 
E0
E3
F0
F4
G0
G1
J6
Document Type: 
Working Paper

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