How Important are Financial Frictions in the U.S. and the Euro Area?

This paper aims to evaluate if frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.Financial frictions; DSGE models; Bayesian estimation

Do Central Banks React to House Prices?

The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.S., U.K.. and Japanese central bank reaction functions.House prices; monetary policy; DSGE models; Bayesian estimation

Københavns Universitet Has the Fed Reacted Asymmetrically to Stock Prices? Has the Fed Reacted Asymmetrically to Stock Prices?

Abstract This paper presents an empirical study of a potential asymmetry in the response of monetary policy to stock prices in the US. The main …nding is that while monetary policy reacts signi…cantly to stock price drops, no signi…cant reaction to stock price increases is found. This result is obtained by applying the method of identi…cation through heteroskedasticity to a daily dataset covering the period 1998-2008. The result is con…rmed in an estimated, augmented Taylor rule based on monthly data for the same period. The size of the estimated, asymmetric reaction is modest. The study constitutes an empirical contribution to the debate about the role of asset prices in monetary policy, which has seen a revival in the aftermath of the crisis. In particular, the results lend empirical support to recent claims that the pre-crisis approach to monetary policy implied an asymmetric policy stance towards stock price movements