Publication detail

Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It

Author(s): PhDr. Michal Hlaváček Ph.D., František Brázdík
Type: Articles in refereed journals
Year: 2011
Number: 0
ISSN / ISBN:
Published in: CNB RESEARCH AND POLICY NOTES
Publishing place:
Keywords: DSGE models, financial accelerator, financial frictions
JEL codes:
Suggested Citation:
Abstract: This survey gives insight into the ongoing research in financial frictions modeling. The
recent financial turmoil has fueled interest in operationalizing financial frictions concepts
and introducing them into tools for policy makers. The rapid growth of the literature
on these issues is the motivation for our review of the presented approaches. The empirical
facts that motivate the inclusion of financial frictions are surveyed. This survey
provides a description of the basic approaches for introducing financial frictions into dynamic
stochastic general equilibrium models. The significance and empirical identification
of the financial accelerator effect is then discussed. The role of financial frictions
models in CNB monetary and macroprudential policy is also described. It is concluded
that given the heterogeneity of the approaches to financial frictions it is beneficial for the
conduct of monetary policy to focus on the development of satellite approaches. The role
of financial frictions in DSGE models for macroprudential policy is also discussed, as
these models can be used to generate stress-testing scenarios. It can be concluded that
DSGE models with financial frictions could complement current stress-testing practice,
but are not able to replace stress tests

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