Financial Intermediaries in an Estimated DSGE Model for the United Kingdom
32 Pages Posted: 23 Mar 2012
Date Written: July 13, 2011
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: Suggested Citation