Federal Reserve Bank of Dallas
The external finance premium and the macroeconomy: US post-WWII evidence
The central variable of theories of financial frictions--the external finance premium--is unobservable. This paper distils the external finance premium from a DSGE model estimated on U.S. macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate--based solely on nonfinancial macroeconomic data--picks up over 70 percent of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.
Cite this item
Ferre De Graeve, The external finance premium and the macroeconomy: US post-WWII evidence, Federal Reserve Bank of Dallas, Working Papers 0809, 2008.
Note: Published as: De Graeve, Ferre (2008), "The External Finance Premium and the Macroeconomy: US Post–WWII Evidence," Journal of Economic Dynamics and Control 32 (1): 3415-3440.
Keywords: Financial markets; Corporate bonds; Corporations - Finance
This item with handle RePEc:fip:feddwp:0809
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