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Financial frictions and the volatility of monetary policy in a DSGE model

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  • Anh Nguyen

Abstract

The paper investigates the impacts of the volatility of monetary policy on the economy in a DSGE model with financial frictions a la Bernanke, Gertler, and Gilchrist (1999). The model is estimated by the particle filter maximum likelihood estimator for the U.S. economy. Our results first show that a positive monetary volatility shock causes a contraction in economic activity: output, consumption, investment, hours, and real wages fall. Second, we argue that financial frictions amplify the effects of the shock via the financial accelerator mechanism. Third, we document that the size of the effects of the shock is relatively small mostly because of the counteracting response of monetary policy to the shock. Therefore, the impacts would be substantial if monetary policy was restrained to respond to changes in current conditions in the economy.

Suggested Citation

  • Anh Nguyen, 2015. "Financial frictions and the volatility of monetary policy in a DSGE model," Working Papers 75949436, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:75949436
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2015_006.pdf
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    References listed on IDEAS

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    3. Martha Elena Delgado-Rojas & Hernán Rincón-Castro, 2017. "Incertidumbre acerca de la política fiscal y ciclo económico," Borradores de Economia 1008, Banco de la Republica de Colombia.
    4. Punzi, Maria Teresa, 2020. "The impact of uncertainty on the macro-financial linkage with international financial exposure," Journal of Economics and Business, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    DSGE models; financial accelerator; Taylor rule; monetary policy; stochastic volatility; particle filter; higher-order approximations; policy uncertainty;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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