Centre for Applied Macroeconomic Analysis
Date & time
Thursday 06 December 2012
Seminar Room 1, Stanner Building (37), Lennox Crossing, ANU
The recent global financial crisis highlights the importance of integrating the financial frictions faced by financial firms within the canonical New Keynesian monetary model. This paper extends Gertler & Karadi (2011) Financial Accelerator model into a two-sector settings and augments financial intermediaries sector. The Two-sector Financial Accelerator model studies the interaction of durable goods, financial frictions and real economic activity. Given a two-sector settings and the breadth of financial structure present, this paper takes into account the differences in the leverage ratios of commercial and investment banks. In addition, a Two-sector Financial Accelerator model introduces additional shocks which capture some features of the sub-prime financial crisis in the simulated economy. The main result underscores the importance of financial sector in propagating shocks to real economy and a shock to financial intermediaries’ asset portfolio precipitates a financial crisis and hinders a real economic activity. Result also shows that the impact on consumption expenditure is also more pronounced in the two-sector FA model compared to the benchmark model due to the presence of collateral effect. Moreover, the Two Sector-FA model also accords with the literature on numbers of issues particularly the behaviour of relative price of durable goods, the expenditure on the durable goods and the price puzzle following the monetary policy tightening shock. Last but not the least, the output recovery to trend would remain slow in our simulated economy as far as the relative price of non-consumption goods is not recovered to its trend.