Fleshing Out the Monetary Transmission Mechanism: Output Composition and the Role of Financial Frictions

49 Pages Posted: 28 Jul 2005

See all articles by André Meier

André Meier

International Monetary Fund

Gernot J. Müller

University of Tuebingen - Department of Economics

Date Written: July 2005

Abstract

Financial frictions affect the way in which different components of GDP respond to a monetary policy shock. We embed the financial accelerator of Bernanke, Gertler and Gilchrist (1999) into a medium-scale Dynamic General Equilibrium model and evaluate the relative importance of financial frictions in explaining monetary transmission. Specifically, we match the impulse responses generated by the model with empirical impulse response functions obtained from a vector autoregression on US time series data. This allows us to provide estimates for the structural parameters of our model and judge the relevance of different model features. In addition, we propose a set of simple and instructive specification tests that can be used to assess the relative fit of various restricted models. Although our point estimates suggest some role for financial accelerator effects, they are actually of minor importance for the descriptive success of the model.

Keywords: Monetary Policy, Output Composition, Financial Frictions, Minimum Distance Estimation

JEL Classification: E32, E44, E51

Suggested Citation

Meier, André and Müller, Gernot J., Fleshing Out the Monetary Transmission Mechanism: Output Composition and the Role of Financial Frictions (July 2005). ECB Working Paper No. 500, Available at SSRN: https://ssrn.com/abstract=726695

André Meier (Contact Author)

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20009
United States

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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