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Title: Financial frictions in the Euro Area and the United States: a Bayesian assessment
Authors: Villa, Stefania
Issue Date: Oct-2014
Publisher: KU Leuven CES
Series Title: CES - Discussion paper series, DPS14.30 pages:1-40
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.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center of International Economics, Leuven

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