Financial Frictions in Data: Evidence and Impact
IMF Working Papers, December 24, 2014
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- Financial Frictions in Data: Evidence and Impact
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Bibliographic details
- Authors: Marzie Taheri Sanjani
- Published: December 24, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484336557.001
Summary
- Investigates financial frictions in US postwar data to understand the interaction between the real business cycle and the credit market.
- Uses a Bayesian estimation technique to estimate a large Vector Autoregression and New Keynesian models.
- Demonstrates how financial shocks can have a large and sluggish impact on the economy.
- Identifies the default risk and the maturity mismatch channels of monetary policy transmission.
- Employs a generalized-IRF to establish countercyclicality of risk spreads.
- Finds that the maturity mismatch shocks produce a stronger impact than the default risk shocks.
Methodology
- Estimation approach: Bayesian estimation technique.
- Models estimated: large Vector Autoregression (VAR) and New Keynesian models.
- Impulse response method: generalized-IRF.
- Empirical focus: US postwar data.
Key findings and quantitative details
- Financial shocks have a "large and sluggish" impact on the economy (as characterized in the paper).
- Two transmission channels identified:
- Default risk channel (default risk).
- Maturity mismatch channel (maturity mismatch risk).
- Comparative impact:
- Maturity mismatch shocks produce a stronger impact than default risk shocks.
- Risk spread behavior:
- Generalized-IRF evidence supports countercyclicality of risk spreads.
Subject areas and keywords
- Subject: Bond yields, Credit, Debt default, Econometric analysis, Economic theory, External debt, Financial frictions, Financial institutions, Impulse response analysis, Money, Vector autoregression.
- Keywords: Bayesian VAR, Bond yields, contractionary monetary policy, corporate bond bond yield, Credit, Debt default, default risk, default risk channel, DSGE, expansionary monetary policy shock, External Financing Premium, Financial Frictions, Financial shocks, Generalized IRF, Liquidity risk, maturity mismatch risk, modelsempirical Vector Auto Regression, monetary policy shock, monetary policy transmission, risk channel, VAR model, Vector autoregression, WP.