Taking financial frictions to the data

Suh, Hyunduk; Walker, Todd B.

doi:10.1016/j.jedc.2015.12.001

Cited by 23 publications

(11 citation statements)

References 48 publications

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“…In fact, it turns out that including financial frictions is essential for replicating fluctuations in financial variables, but the statistical fit is worse than the workhorse New Keynesian model. A similar result is obtained by Suh and Walker () and Lindé, Smets, and Wouters (). Moreover, Gerali et al () find that financial shocks contributed to explain the output fall during the 2007 financial crisis, but in their model a bank capital loss cannot replicate the amplitude of the 2007–2008 downturn.…”

Section: Introductionsupporting

confidence: 89%

Limited Asset Market Participation and the Euro Area Crisis: An Empirical Dsge Model

2019

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We estimate a medium‐scale dynamic stochastic general equilibrium model for the Euro area with limited asset market participation (LAMP). Our results suggest that in the recent European Monetary Union years LAMP is particularly sizable (39% during 1993–2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP model is preferred to its representative household counterpart. In the representative agent model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP model this role is played by the investment‐specific shock, because non‐Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect the contractionary role of monetary policy shocks during the post‐2007 years. In this period consumption of non‐Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance. (JEL C11, C13, C32, E21, E32, E37)

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Section: Introductionsupporting

confidence: 89%

Limited Asset Market Participation and the Euro Area Crisis: An Empirical Dsge Model

2019

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“…He finds that a major difference between the three recessions is that the most recent recession was plagued by large monetary policy shocks. Suh and Walker (2016) use Bayesian methods to estimate an unconstrained, medium-scale, linear New Keynesian model with financial frictions. They find monetary policy shocks played a major role in explaining the changes in consumption and investment during the Great Recession.…”

Section: Introductionmentioning

confidence: 99%

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Richter¹,

Throckmorton²

2016

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This paper examines the importance of using nonlinear methods to account for the zero lower bound (ZLB) on the Fed's policy rate. We estimate three models with a particle filter: (1) a nonlinear model with a ZLB constraint; (2) a constrained linear model that imposes the constraint in the filter but not the solution; and (3) an unconstrained linear model that never imposes the constraint. The linear models have a lower likelihood than the nonlinear model when the Fed is constrained and predict large monetary policy shocks during the ZLB period. We also compare the predictions from our nonlinear model to the quasi-linear solution with OccBin. OccBin captures the ZLB much better than the linear solutions but it still generates less endogenous volatility than the nonlinear model and it is not as conducive to estimation. Finally, we extend the baseline model to include a banking sector. We find larger differences between the predictions from the nonlinear model and both the linear and quasi-linear models.

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“…The theoretical DSGE literature incorporating non-trivial …nancial frictions and a banking sector has been rapidly expanding since the outset of the …nancial crisis. 1 Unfortunately, empirical DSGE models (Brzoza-Brzezina and Kolasa, 2013;Suh and Walker, 2016) …nd that modelling …nancial frictions is essential for replicating ‡uctuations in …nancial variables, but the ampli…cation mechanism caused by …nancial frictions has relatively weak e¤ects of real variables and is not su¢ cient to improve over the statistical …t of the workhorse New Keynesian model, such as Smets and Wouters (2007).…”

Section: Modelling Strategymentioning

confidence: 99%

Debunking the Myth of Southern Profligacy. A DSGE Analysis of Business Cycles in the EMU's Big Four

2017

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We investigate the drivers of EMU big fours' business cycles in a DSGE model. Our approach allows to disentangle the role of demand and technology shocks, where the latter may generate permanent consequences on national productivity levels. For the years before the …nancial crisis we cannot …nd evidence of a demand-driven boom in Spain and Italy relative to what happened in France and Germany. The aftermath of the sovereign bond crisis was characterized by a sequence of adverse permanent technology shocks both in Spain and in Italy. These latter results are consistent with recent theoretical developments that emphasize the adverse supply-side e¤ects of a credit crunch.

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Taking financial frictions to the data

Cited by 23 publications

References 48 publications

Limited Asset Market Participation and the Euro Area Crisis: An Empirical Dsge Model

Limited Asset Market Participation and the Euro Area Crisis: An Empirical Dsge Model

Are Nonlinear Methods Necessary at the Zero Lower Bound?

Debunking the Myth of Southern Profligacy. A DSGE Analysis of Business Cycles in the EMU's Big Four

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