Ajello, Andrea (2010): Financial intermediation, investment dynamics and business cycle fluctuations.
This is the latest version of this item.
Download (341kB) | Preview
Download (341kB) | Preview
Download (341kB) | Preview
How important are financial friction shocks in business cycles fluctuations? To answer this question, I use micro data to quantify key features of US financial markets. I then construct a dynamic equilibrium model that is consistent with these features and fit the model to business cycle data using Bayesian methods. In my micro data analysis, I establish facts that may be of independent interest. For example, I find that a substantial 35% of firm investment is funded using financial markets. The dynamic model introduces price and wage rigidities and a financial intermediation shock into Kiyotaki and Moore (2008). According to the estimated model, the financial intermediation shock explains around 35% of GDP and 60% of investment volatility. The estimation assigns such a large role to the financial shock for two reasons: (i) the shock is closely related to the interest rate spread, and this spread is strongly countercyclical and (ii) according to the model, the response in consumption, investment, employment and asset prices to a financial shock resembles the behavior of these variables over the business cycle.
|Item Type:||MPRA Paper|
|Original Title:||Financial intermediation, investment dynamics and business cycle fluctuations|
|English Title:||Financial Intermediation, Investment Dynamics and Business Cycle Fluctuations|
|Keywords:||DSGE model; Bayesian estimation; Financial frictions; Financial Shocks; Great Recession|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models
B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Andrea Ajello|
|Date Deposited:||07. Dec 2011 14:57|
|Last Modified:||20. Apr 2014 19:07|
Akerlof, G. (1970). The market for “lemons”: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics 84 (3), 488–500.
An, S. and F. Schorfheide (2007). Bayesian analysis of DSGE models. Econometric Reviews 26 (2), 113–172.
Barro, R. and R. King (1984). Time-separable preferences and intertemporal-substitution models of business cycles. The Quarterly Journal of Economics, 817–839.
Bernanke, B., M. Gertler, and S. Gilchrist (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics 1, 1341–1393.
Calvo, G. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Eco- nomics 12(3), 383–398.
Carlstrom, C. and T. Fuerst (1997). Agency costs, net worth, and business fluctuations: A com- putable general equilibrium analysis. The American Economic Review 87 (5), 893–910.
Chari, V., P. Kehoe, and E. McGrattan (2007). Business cycle accounting. Econometrica 75(3), 781–836.
Chari, V. V., L. J. Christiano, and M. Eichenbaum (1995, November). Inside money, outside money, and short-term interest rates. Journal of Money, Credit and Banking 27 (4), 1354–86.
Chari, V. V. and P. Kehoe (2009). Confronting models of financial frictions with the data. Presentation (mimeo).
Christiano, L. and J. Davis (2006). Two flaws in business cycle accounting. NBER Working Paper . Christiano, L., R. Motto, and M. Rostagno (2010, May). Financial factors in economic fluctuations. Working Paper Series 1192, European Central Bank.
Christiano, L., M. Trabandt, and K. Walentin (2009). DSGE Models for Monetary Policy. draft for the Handbook of Monetary Economics, edited by Friedman and Woodford, available at: http://www. ecb. int/events/pdf/conferences/monetaryeconomics/item11 paper. pdf .
Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005, February). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.
Cúrdia, V. and M. Woodford (2010). Conventional and unconventional monetary policy. Federal Reserve Bank of St. Louis 92 (4), 229–64.
Del Negro, M., G. Eggertsson, A. Ferrero, and N. Kiyotaki (2010). The great escape? A quantitative evaluation of the Fed’s non-standard policies. unpublished, Federal Reserve Bank of New York.
Del Negro, M., F. Schorfheide, F. Smets, and R. Wouters (2007). On the fit of new Keynesian models. Journal of Business and Economic Statistics 25 (2), 123–143.
Erceg, C. J., D. W. Henderson, and A. T. Levin (2000, October). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46 (2), 281–313.
Fama, E. and H. Babiak (1968). Dividend policy: An empirical analysis. Journal of the American Statistical Association 63 (324), 1132–1161. Fernald, J. (2009). A Quarterly, Utilization-Adjusted Series on Total Factor Productivity. Manuscript, Federal Reserve Bank of San Francisco.
Gilchrist, S., V. Yankov, and E. Zakrajsek (2009, April). Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets. NBER Working Papers 14863, National Bureau of Economic Research, Inc.
Goodfriend, M. and B. T. McCallum (2007, June). Banking and interest rates in monetary policy analysis: A quantitative exploration. NBER Working Papers 13207, National Bureau of Economic Research, Inc.
Guerrieri, V. and G. Lorenzoni (2011). Credit crises, precautionary savings and the liquidity trap. Working Paper.
Hansen, L. and R. Jagannathan (1991). Implications of security market data for models of dynamic economies. Journal of Political Economy 99 (2), 225–262.
Justiniano, A., G. Primiceri, and A. Tambalotti (2010). Investment shocks and business cycles. Journal of Monetary Economics 57 (2), 132–145.
Kiyotaki, N. and J. Moore (2008). Liquidity, bussiness cycles and monetary policy. Ese discussion papers, Working Paper.
Kurlat, P. (2009). Lemons, market shutdowns and learning. Job Market Paper, 1–70.
Leary, M. and R. Michaely (2008). Why Firms Smooth Dividends: Empirical Evidence. Johnson School Research Paper Series No. 11-08.
Leeper, E. M., M. Plante, and N. Traum (2010, June). Dynamics of fiscal financing in the united states. Journal of Econometrics 156 (2), 304–321.
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. The American Economic Review 46 (2), 97–113.
Mehra, R. and E. Prescott (1985). The equity premium: A puzzle* 1. Journal of monetary Economics 15 (2), 145–161.
Nezafat, P. and C. Slavík (2009). Asset prices and business cycles with financial frictions. Job Market Paper.
Rotemberg, J. J. and M. Woodford (1993, October). Dynamic general equilibrium models with imperfectly competitive product markets. NBER Working Papers 4502, National Bureau of Economic Research, Inc.
Smets, F. and R. Wouters (2003). An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1 (5), 1123–1175.
Smets, F. and R. Wouters (2005). Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach. Journal of Applied Econometrics 20 (2), 161–183.
Smets, F. and R. Wouters (2007, June). Shocks and frictions in us business cycles: A bayesian dsge approach. American Economic Review 97 (3), 586–606.
Stock, J. H. and M. W. Watson (1999, 00). Business cycle fluctuations in us macroeconomic time series. In J. B. Taylor and M. Woodford (Eds.), Handbook of Macroeconomics, Volume 1 of Handbook of Macroeconomics, Chapter 1, pp. 3–64. Elsevier.
Weston, J. and S. Weaver (2004). Mergers & Acquisitions. McGraw-Hill Professional.
Woodford, M. (1990, May). Public debt as private liquidity. American Economic Review 80(2), 382–88.
Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.
Available Versions of this Item
Financial intermediation, investment dynamics and business cycle fluctuations. (deposited 27. Jul 2011 17:44)
- Financial intermediation, investment dynamics and business cycle fluctuations. (deposited 07. Dec 2011 14:57) [Currently Displayed]