The Empirical Performance of the Financial Accelerator Since 2008
49 Pages Posted: 21 Jun 2022 Last revised: 5 Jul 2022
Date Written: June 16, 2022
We use nonlinear Bayesian methods to evaluate the performance of financial frictions á la Bernanke et al. (1999) during and after the Global Financial Crisis. We find that, despite the attention received in the literature, including these frictions in the canonical medium-scale DSGE model does not improve the model's ability to explain macroeconomic dynamics in the US during the Great Recession. The reason is that in the estimated model with financial frictions, the firms' leverage declines in response to the post-2008 collapse of investment, which in turn implies a narrowing of the credit spread. Hence, the estimated model predicts financial decelerator effects. Associated financial shocks play only a minor role for macroeconomic dynamics. Our estimates account for the binding effective lower bound on nominal interest rates, and confirm our findings independently for US and euro area data.
Keywords: Financial Frictions, Great Recession, Business Cycles, Effective Lower Bound, Nonlinear Bayesian Estimation
JEL Classification: C11, C63, E31, E32, E44, E52
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