Journal
ECONOMIC MODELLING
Volume 29, Issue 6, Pages 2460-2485Publisher
ELSEVIER
DOI: 10.1016/j.econmod.2012.06.024
Keywords
Financial frictions; Euro area; DSGE modeling; Bayesian estimation; Simulation; Decompositions
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We build a model of the euro area incorporating financial market frictions at the level of firms and households. Entrepreneurs borrow from financial intermediaries in order to purchase business capital, in the spirit of the financial accelerator literature. We also introduce two types of households that differ in their degree of time preference. All households have preferences for housing services. The impatient households are faced with a collateral constraint that is a function of the value of their housing stock. Our aim is to provide a unified framework for policy analysis that emphasises financial market frictions alongside the more traditional model channels. The model is estimated by Bayesian methods using euro area aggregate data and model properties are illustrated with simulation and conditional variance and historical shock decomposition. (C) 2012 Elsevier B.V. All rights reserved.
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