Estimating Contract Indexation in a Financial Accelerator Model

36 Pages Posted: 20 Jun 2012 Last revised: 29 Oct 2014

See all articles by Charles T. Carlstrom

Charles T. Carlstrom

Federal Reserve Bank of Cleveland

Timothy S. Fuerst

University of Notre Dame

Alberto Ortiz

Oberlin College; EGADE Business School del Tecnológico de Monterrey

Date Written: October 1, 2013

Abstract

This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.

Keywords: agency costs, financial accelerator, business cycles

JEL Classification: E32, E44

Suggested Citation

Carlstrom, Charles T. and Fuerst, Timothy S. and Ortiz, Alberto, Estimating Contract Indexation in a Financial Accelerator Model (October 1, 2013). FRB of Cleveland Working Paper No. 12-16r, Available at SSRN: https://ssrn.com/abstract=2088265

Charles T. Carlstrom (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States
216-579-2294 (Phone)
216-579-3050 (Fax)

Timothy S. Fuerst

University of Notre Dame ( email )

Notre Dame, IN 46556
United States

Alberto Ortiz

Oberlin College ( email )

Oberlin, OH 44074
United States

EGADE Business School del Tecnológico de Monterrey ( email )

Av. Eugenio Garza Sada #2501
Col. Tecnológico
Monterrey, Nuevo León 64849
Mexico

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