Template-Type: ReDIF-Paper 1.0
Title: The Empirical Performance of Financial Frictions since 2008
Author-Name: Gregor Boehl
Author-Email: gboehl@uni-bonn.de
Author-Name: Felix Strobel
Classification-JEL:  C11, C63, E31, E32, E44
Keywords: Financial Frictions, Great Recession, Business Cycles, Effective Lower Bound,
Nonlinear Bayesian Estimation

Abstract: We use nonlinear Bayesian methods to evaluate the performance of financial frictions `a 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.

Note: 
Length: 48
Creation-Date: 2022-06
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp353
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2022_353