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Federal Reserve Bank of Dallas
Working Papers
The external finance premium and the macroeconomy: US post-WWII evidence
Ferre De Graeve
Abstract

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.


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Ferre De Graeve, The external finance premium and the macroeconomy: US post-WWII evidence, Federal Reserve Bank of Dallas, Working Papers 0809, 2008.
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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.
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Keywords: Financial markets; Corporate bonds; Corporations - Finance
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