Financial Frictions and Shocks in an Estimated Small Open Economy DSGE Model

This paper examines the importance of financial frictions and shocks for macroeconomic fluctuations using an estimated small open economy DSGE model. In doing so, a small open economy DSGE model with unemployment, financial frictions and financial shocks is developed. To quantify effects, the model...

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Bibliographic Details
Published in:Journal of quantitative economics : journal of the Indian Econometric Society 2020-06, Vol.18 (2), p.253-291
Main Authors: Doojav, Gan-Ochir, Kalirajan, Kaliappa
Format: Article
Language:English
Subjects:
Econometrics
Economics
Economics and Finance
Finance
Game Theory
Insurance
Management
Original Article
Social and Behav. Sciences
Statistics for Business
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Summary:This paper examines the importance of financial frictions and shocks for macroeconomic fluctuations using an estimated small open economy DSGE model. In doing so, a small open economy DSGE model with unemployment, financial frictions and financial shocks is developed. To quantify effects, the model is estimated using Bayesian methods on Australian and the United States (US) data. The main results are (i) the presence of financial accelerator improves the model fit, and (ii) financial shocks (i.e., credit supply and financial wealth shocks) are important for explaining investment and output fluctuations, (iii) including financial data in the analysis changes the model dynamics and influences the significance of the financial and marginal efficiency of investment (MEI) shocks, and (iv) financial shocks play an important role in generating business cycle fluctuations in both Australia and the US.
ISSN:0971-1554
2364-1045
DOI:10.1007/s40953-019-00179-7