Financial Frictions and Sources of Business Cycle

34 Pages Posted: 22 Nov 2014

Date Written: October 2014

Abstract

This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.

Keywords: Business cycles, Financial intermediaries, General equilibrium models, DSGE, Bayesian Estimation, Financial Frictions, Sources of Business Cycle, business cycle fluctuations, moral hazard, financial sector, bond, gdp deflator, real gdp, nominal interest rate, financial markets, tfp, corporate bond, real business cycle, financial intermediation, bond yields, gross domestic product, equity capital, stock valuations, financial assets, stock market, net present value, technological change, fisher equation, total factor productivity, gdp growth, financial system, money market, stock markets, gdp per capita, asset valuation

JEL Classification: C11, E44, E47, E52, E58

Suggested Citation

Taheri Sanjani, Marzie, Financial Frictions and Sources of Business Cycle (October 2014). IMF Working Paper No. 14/194, Available at SSRN: https://ssrn.com/abstract=2529313

Marzie Taheri Sanjani (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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