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Financial Factors in Economic Fluctuations

133 Pages Posted: 26 May 2010  

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Roberto Motto

European Central Bank (ECB)

Massimo Rostagno

European Central Bank (ECB)

Date Written: April 26, 2010

Abstract

We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force.

Keywords: DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Lending channel, Funding channel

JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3

Suggested Citation

Christiano, Lawrence J. and Motto, Roberto and Rostagno, Massimo, Financial Factors in Economic Fluctuations (April 26, 2010). ECB Working Paper No. 1192. Available at SSRN: https://ssrn.com/abstract=1600166

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
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847-491-8231 (Phone)
847-491-7001 (Fax)

Federal Reserve Bank of Cleveland

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Cleveland, OH 44101-1387
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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Massimo Rostagno

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany
+49 69 1344 7663 (Phone)
+49 69 1344 7604 (Fax)

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