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.
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
Yagihashi, Takeshi, "The Cost of Omitting Credit Channel in DSGE Model" (2013). Economics Faculty Publications. 22.