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Bayesian Estimation of Financial Frictions : An Encompassing View

Author: Abdellah Manadir; Kevin Moran
Publisher: Québec, QC, CA: Centre de recherche sur les risques les enjeux économiques et les politiques publiques, 2018.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
This paper compares the environments in Bernanke et al. (1999) and Gertler and Karadi (2011), two popular frameworks used to incorporate financial frictions in macroeconomic modelling. We show that the key practical difference between the two frameworks lies in their implications for the link between leverage and expected future spreads of capital returns over safe rates: while the former pairs leverage to  Read more...
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Genre/Form: Electronic books
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Abdellah Manadir; Kevin Moran
OCLC Number: 1056730671
Notes: Issued as part of the desLibris documents collection.
Description: 1 online resource (27 pages)
Responsibility: Abdellah Manadir.
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Abstract:

This paper compares the environments in Bernanke et al. (1999) and Gertler and Karadi (2011), two popular frameworks used to incorporate financial frictions in macroeconomic modelling. We show that the key practical difference between the two frameworks lies in their implications for the link between leverage and expected future spreads of capital returns over safe rates: while the former pairs leverage to one-period-hence such spreads, the latter connects it to a distributed lag of all future spreads. We argue that this difference between the two frameworks is more crucial than the distinction often discussed in the literature, which is related to the specific location of the friction on the borrower-intermediary-entrepreneur financing chain. The paper then compares quantitative versions of the frameworks, estimated using Bayesian procedures and decoupling parameter settings related to steady states from those involving the economy's dynamic solution around that steady state. We find that when this flexible approach in used, the friction proposed by Gertler and Karadi (2011), which emphasize long-term forward-looking behavior in the leverage equation, is preferred by aggregate data.

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