An Estimated DSGE Model with Search and Matching Frictions in the Credit Market

56 Pages Posted: 19 Feb 2015

Date Written: October 23, 2014

Abstract

Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures. Finally, since there is still some disagreement about the theoretical mechanism by which the interest rate on loans is derived, we survey and compare these theoretical devices with that proposed by this paper.

Keywords: Interest rate pass-through, Credit Spread, Search and Matching, Credit Market Frictions, Bayesian techniques

JEL Classification: C78, E13, E43, E44

Suggested Citation

Liberati, Danilo, An Estimated DSGE Model with Search and Matching Frictions in the Credit Market (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 986, Available at SSRN: https://ssrn.com/abstract=2566749 or http://dx.doi.org/10.2139/ssrn.2566749

Danilo Liberati (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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