Imperfect Information About Financial Frictions and Consequences for the Business Cycle

46 Pages Posted: 21 Jun 2016

See all articles by Josef Hollmayr

Josef Hollmayr

Goethe University Frankfurt

Michael Kuehl

Deutsche Bundesbank - Economics Department

Date Written: 2015

Abstract

In this paper, we discuss the consequences of imperfect information about financial frictions on the macroeconomy. We rely on a New Keynesian DSGE model with a banking sector in which we introduce imperfect information about a limited enforcement problem. Bank managers divert resources and can increase the share of diversion. This can only be observed imperfectly by depositors. The ensuing imperfect information generates a higher volatility of the business cycle. Spillovers from the financial sector to the real economy are higher and shocks in general are considerably amplified in the transition period until agents' learning is complete. Volatility and second-order moments also display an amplification under the learning setup compared with the rational expectations framework.

Keywords: DSGE Model, Financial Frictions, Learning

JEL Classification: E3, E44, G3

Suggested Citation

Hollmayr, Josef and Kühl, Michael, Imperfect Information About Financial Frictions and Consequences for the Business Cycle (2015). Bundesbank Discussion Paper No. 07/2015. Available at SSRN: https://ssrn.com/abstract=2797031

Josef Hollmayr (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Michael Kühl

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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