Title: An estimated DSGE model with search and matching frictions in the credit market

Authors: Danilo Liberati

Addresses: Directorate General for Economics, Statistics and Research, Bank of Italy, Via Nazionale 91, 00184 Rome, Italy

Abstract: Financial frictions have become fundamental for studying the business cycle and credit market dynamics. This work adds to the existing literature by introducing a search and matching scheme in the financial market into a cash in advance New Keynesian DSGE theoretical model. We provide an alternative explanation of the degree of incompleteness in the pass-through from policy rate to loan rates depending on credit market tightness, the search costs sustained by banks, and the relative powers of the agents in loan interest rate bargaining. The model is able to reproduce the countercyclical behaviour of the credit spread with respect to a positive technology shock. It also proposes a scenario in which a credit shock hits the economy. The model is estimated by using the Bayesian procedures.

Keywords: interest rate pass-through; credit spread; search and matching; credit market frictions; Bayesian techniques.

DOI: 10.1504/IJMEF.2018.097203

International Journal of Monetary Economics and Finance, 2018 Vol.11 No.6, pp.567 - 617

Received: 12 Jun 2017
Accepted: 28 Jun 2018
Published online: 02 Jan 2019 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article