Financial Intermediaries in an Estimated DSGE Model for the United Kingdom
University of Foggia; KU Leuven - Faculty of Business and Economics (FEB)
Bank of England
July 13, 2011
Bank of England Working Paper No. 431
Gertler and Karadi combined financial intermediation and credit policy in a DSGE framework. We estimate their model with UK data using Bayesian techniques. To validate the fit, we evaluate the model’s empirical properties. Then we analyse the transmission mechanism of the shocks, set to produce a downturn. Finally, we examine the empirical importance of nominal, real and financial frictions and of different shocks. We find that banking friction seems to play an important role in explaining the UK business cycle. Moreover, the banking sector shock seems to explain about half of the fall in real GDP in the recent crisis. A credit supply shock seems to account for most of the weakness in bank lending.
Number of Pages in PDF File: 32
Keywords: Financial friction, DSGE, Bayesian estimation
JEL Classification: C11, E44
Date posted: March 23, 2012
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