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

This paper aims to evaluate the importance of frictions in credit mar-kets for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE \u85nancial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) and estimate it using Bayesian methods. The model is augmented with frictions such as price indexation to past ina-tion, sticky wages, consumption habits and variable capital utilization. My results indicate that \u85nancial frictions are relevant in both areas. Us-ing the Bayes factor as criterion, the data favors the model with \u85nancial frictions both in the U.S. and the Euro area in \u85ve di¤erent speci\u85cations of the model. Moreover, the size of the \u85nancial frictions is larger in the Euro area