Document Type

Working Paper

Publication Date

7-2013

Pages

1-35

Abstract

This paper discusses whether the parameter invariance problem as in Lucas (1976) applies to the standard new Keynesian DSGE model when the credit channel is left out from its structure. We simulate a financial crisis in which the credit market friction is positive and we shift the monetary policy to stimulate the economy. We evaluate the cost of omitting the credit channel by examining the changes of the estimated model parameters and by using policy outcomes. We find that although some parameters incur nontrivial changes after the policy shift, overall these parameter changes have little impact on the conduct of monetary policy.

Comments

NOTE: This is an unpublished working paper of Takeshi Yagihashi.

ORCID

0000-0001-9916-6008 (Takeshi Yagihashi)

Original Publication Citation

Yagihashi, T. (2013). The Cost of Omitting Credit Channel in DSGE Model. Economics. Old Dominion University. Retrieved from https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnx0YWtlc2hpeWFnaWhhc2hpfGd4OjE5NTZlYjI4ZDM2YjZkMGM

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