Financial Intermediaries in an Estimated DSGE Model for the United Kingdom

32 Pages Posted: 23 Mar 2012  

Stefania Villa

University of Foggia; KU Leuven - Faculty of Business and Economics (FEB)

Jing Yang

Bank of England

Date Written: July 13, 2011

Abstract

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.

Keywords: Financial friction, DSGE, Bayesian estimation

JEL Classification: C11, E44

Suggested Citation

Villa, Stefania and Yang, Jing, Financial Intermediaries in an Estimated DSGE Model for the United Kingdom (July 13, 2011). Bank of England Working Paper No. 431. Available at SSRN: https://ssrn.com/abstract=2026956 or http://dx.doi.org/10.2139/ssrn.2026956

Stefania Villa

University of Foggia

Largo Papa Giovanni Paolo
Foggia, 71100
Italy

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Jing Yang (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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