Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets

31 Pages Posted: 3 Feb 2014

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Britta Niehof

University of Marburg

Date Written: September 10, 2013

Abstract

In light of the recent financial and real economic crisis, it seems clear that macroeconomists need to better account for the influence of financial markets. This paper explores the consequences of treating the interaction between different financial markets, monetary policy, and the real economy seriously by developing a fully dynamic theoretical model. Starting from a standard New Keynesian framework, we reformulate and extend the model by means of stochastic differential equations so as to analyse spillover effects and steady-state properties. We solve the model for theoretically derived parameters, distinguishing between (almost) closed, equally sized, and differently sized economies. Applying Bayesian estimation methods, we estimate model parameters for Canada and the United States. Using Lyapunov techniques, we find evidence of instability in the US and Canadian financial systems.

Keywords: New Keynesian Model, Philipps Curve, Taylor Rule, Stochastic Differential Equations

JEL Classification: C02, C63, E44, E47, E52, F41

Suggested Citation

Hayo, Bernd and Niehof, Britta, Studying International Spillovers in a New Keynesian Continuous Time Framework with Financial Markets (September 10, 2013). Available at SSRN: https://ssrn.com/abstract=2389650 or http://dx.doi.org/10.2139/ssrn.2389650

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Britta Niehof

University of Marburg ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

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