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Financial frictions in Latvia

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  • Ginters Buss

    (Bank of Latvia)

Abstract

This paper builds a dynamic stochastic general equilibrium (DSGE) model for Latvia that would be suitable for policy analysis and forecasting purposes at Bank of Latvia. For that purpose, I adapt the DSGE model with financial frictions of Christiano et al. (J Econ Dyn Control 35:1999–2041, 2011. doi: 10.1016/j.jedc.2011.09.005 ) to Latvia’s data, estimate it, and study whether adding the financial frictions block to an otherwise identical (‘baseline’) model is an improvement with respect to several dimensions. The main findings are: (1) The addition of the financial frictions block provides more appealing interpretation for the drivers of economic activity and allows to reinterpret their role; (2) financial frictions played an important part in Latvia’s 2008-recession; (3) the financial frictions model beats both the baseline model and the random walk model in forecasting both CPI inflation and GDP.

Suggested Citation

  • Ginters Buss, 2016. "Financial frictions in Latvia," Empirical Economics, Springer, vol. 51(2), pages 547-575, September.
    • Handle: RePEc:spr:empeco:v:51:y:2016:i:2:d:10.1007_s00181-015-1014-z
    DOI: 10.1007/s00181-015-1014-z
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    References listed on IDEAS

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    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
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    Cited by:

    1. Ginters Bušs & Patrick Grüning, 2023. "Fiscal DSGE model for Latvia," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 23(1), pages 2173915-217.
    2. Konstantins Benkovskis & Eduards Goluzins & Olegs Tkacevs, 2016. "CGE model with fiscal sector for Latvia," Working Papers 2016/01, Latvijas Banka.
    3. Ginters Buss, 2017. "Wage Formation, Unemployment and Business Cycle in Latvia," Working Papers 2017/01, Latvijas Banka.

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    More about this item

    Keywords

    DSGE model; Financial frictions; Small open economy; Bayesian estimation; Currency union; Forecasting;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F0 - International Economics - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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