Monetary Policy in an Estimated DSGE Model with a Financial Accelerator," Bank of Canada working paper 03-27 133

This paper estimates a sticky-price DSGE model with a financial accelerator to assess the evidence for the existence and importance of financial frictions in the amplification and propagation of the effects of transitory shocks. Structural parameters of two models, one with and one without a financial accelerator, are estimated using a maximum-likelihood procedure and post-war US data. The estimation results provide some quantitative evidence in favour of the financial accelerator model, but the simulation results do not. The sensitivity of the external finance premium to changes in the leverage ratio is found to be lower in the post-1979 period then over the two preceeding decades. ∗We thank Simon Gilchrist and workshop participants at the Bank of Canada for their very helpful comments and discussion. Of course, we are solely responsible for any remaining errors. The views expressed in this paper are ours. No responsibility for them should be attributed to the Bank of Canada