A time varying DSGE model with financial frictions

Abstract

We build a time varying DSGE model with …nancial frictions in order to evaluate changes in the responses of the macroeconomy to …nancial friction shocks. Using US data, we …nd that the transmission of the …nancial friction shock to economic variables, such as output growth, has not changed in the last 30 years. The volatility of the …nancial friction shock, however, has changed, so that output responses to a one-standard deviation of the shock increase twofold in JEL codes: C11, C53, E27, E52

Financial development and economic growth: long‐run equilibrium and transitional dynamics

“…Another line of research following the Great Recession consists of introducing financial frictions in standard DGSE frameworks in order to incorporate into large scale monetary policy models the lessons learnt from the crisis (see, among others, Brzoza–Brzezina et al ., ; Kolasa and Rubaszek, ; and Galvao et al ., ).…”

Time-varying Cointegration and the UK Great Ratios

“…Others (eg Canova (2006), Canova and Sala (2009) and Castelnuovo (2012)) allow for parameter variation by simply estimating models over rolling samples. 2 Galvão et al (2016) by contrast use methods similar to those employed in this paper. Finally, Kulish and Pagan (2017) consider some different assumptions about belief updating and explore various solution methods.…”

The behaviour of the Romanian economy analysed based on a dynamic stochastic general equilibrium model

“…The variety of such models is complex, as the same approaches are oriented towards different purposes, such as the identification of the most appropriate measures for controlling market mechanisms (Christiano, Trabandt, & Karl, 2010); outlining the impact of individual forecasts relating to interest rate, inflation rate and gross domestic product on aggregate predictive performance (Smets et al, 2014); investigating, while considering the financial accelerator, the role of financial mechanisms in translating financial market dysfunctions into the real economy (Merola, 2015); considering the effects of goal-based and rule-based frameworks on diminishing macroeconomic policy distortions, and on increasing its flexibility and efficacy only when related to the output efficiency gap (Walsh, 2015); the demonstration that time-varying D.S.G.E. models based on financial frictions increase economic growth and inflation rate forecasting accuracy in periods of tranquillity, the fixed coefficient ones being fit rather for crisis-related periods (Galvão, Giraitis, Kapetanios, & Petrova, 2016); or that, in the absence of observed exchange rate high-volatility replication, considering the real exchange rate mean reversion for long time horizons as well as the international price co-movement present in data, all premises are laid for real exchange rate-pertinent forecasts (Ca'Zorzi, Kolasa, & Rubaszek, 2017); these are just several interesting and useful studies based on this class of models.…”