Assessing Macro-Financial Linkages: A Model Comparison Exercise
56 Pages Posted: 21 Jun 2016
Date Written: 2012
The recent global financial crisis has increased interest in macroeconomic models that incorporate financial linkages. Here, we compare the simulation properties of five mediumsized general equilibrium models used in Eurosystem central banks which incorporate such linkages. The financial frictions typically considered are the financial accelerator mechanism (convex \spread costs related to firms' leverage ratios) and collateral constraints (based on asset values). The harmonized shocks we consider illustrate the workings and mechanisms underlying the financial-macro linkages embodied in the models. We also look at historical shock decompositions of real GDP growth across the models since 2005 in order to shed light on the common driving factors underlying the recent financial crisis. In these exercises, the models share qualitatively similar and interpretable features. This gives us confidence that we have some broad understanding of the mechanisms involved. In addition, we also survey the current and developing trends in the literature on financial frictions.
Keywords: Financial Frictions, Credit Constraints, Financial Accelerator, Model Comparison, Eurosystem central bank models
JEL Classification: E32, E44, E47, E52
Suggested Citation: Suggested Citation