BoE paper outlines DSGE model of financial and real frictions

Bank of England

Building financial and real economy frictions into a dynamic stochastic general equilibrium model can generate important insights for the macroeconomy, according to a working paper published by the Bank of England.

Authors Stephen Millard, Alexandra Varadi and Eran Yashiv calibrate a DSGE model of the US economy with both financial frictions and labour market frictions. The model also contains price frictions and habits in consumption.

The model requires firms to borrow from the banking sector

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