Marcin Kolasa

The Anatomy of Standard DSGE Models with Financial Frictions

In this paper we compare two standard extensions to the New Keynesian model featuring financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. Our goal is to compare the workings of the two setups. Towards this end, we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we make a thorough analysis of the two frameworks using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to generate hump-shaped impulse responses and, for some important variables, shows moments that are inconsistent with the data by a large margin.

Financial Frictions and Optimal Monetary Policy in an Open Economy

A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement.

Firms in the Great Global Recession: The Role of Foreign Ownership and Financial Dependence

This paper investigates the channels through which the global crisis of 2008-2009 spread to economic activity of an emerging, fast growing economy with sound macroeconomic fundamentals. On the basis of Polish firm-level data we find that a number of individual firm characteristics account for a heterogeneous response. In particular, foreign ownership appears to have provided a higher degree of resilience to the crisis. Our results indicate that this effect might be due to intra-group lending mechanisms supporting affiliates facing external credit constraints.

Macroprudential Policy and Imbalances in the Euro Area

Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial model and simulate the effects of macroprudential policy (regulating the loan-to-value ratio) when the core and the periphery are exposed to asymmetric shocks. We find that macroprudential policy is able to substantially lower the amplitude of credit and output fluctuations in the periphery. However, for the policy to be effective, it should be decentralized. Very similar conclusions hold when welfare is considered as the optimality criterion.

Productivity, Innovation and Convergence in Poland

This paper provides evidence on factors driving productivity growth in the new EU member states, focusing on Polish manufacturing industries. The results obtained indicate that companies in Poland benefit significantly from transfer of technologies accumulated in more developed economies. No strong evidence is found on immediate technology transfer. The significant effect of domestic innovation activity is mainly due to its impact on the speed of convergence and is particularly strong in high-tech industries, relatively privatized industries and industries initially further from the technological frontier.

Bayesian Evaluation of DSGE Models with Financial Frictions

We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke et al. (1999) setup, where financial frictions enter through the price of loans, and the Kiyotaki and Moore (1997) model, where they concern the quantity of loans. We take both models to the US data and check how well they fit it on several margins. Overall, comparing the models favors the framework of Bernanke et al. (1999). However, even this model is not able to make a clear improvement over the benchmark New Keynesian model, and the Kiyotaki and Moore (1997) underperforms it on several margins. Furthermore, none of the extensions explains the 2007-09 recession as significantly more “financial” than several previous ones.

Can We Prevent Boom-Bust Cycles During Euro Area Accession?

Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare.

A Penalty Function Approach to Occasionally Binding Credit Constraints

Empirical evidence suggests that contractionary monetary and macroprudential policies have stronger effects than expansionary ones. We introduce this feature into a structural DSGE model with financial frictions. The asymmetry results from the assumption of occasionally binding credit constraints which we introduce via a penalty function. Our simulations show that a large loan-to-value ratio (our macroprudential tool) tightening can have a much stronger impact on the economy than a loosening of the same size. In contrast, small policy innovations, whether expansionary or contractionary, have effects of almost equal magnitude. Our approach provides an interesting way of modeling asymmetric effects of financial frictions for policy purposes.

Monetary and Macroprudential Policy with Multi-Period Loans

We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications – variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and possibility for the collateral constraint to become slack – to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multi-period contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities.

Business Cycles in EU New Member States: How and Why are They Different?

This paper uses the business cycle accounting framework to investigate the differences between economic fluctuations in Central and Eastern European (CEE) countries and the euro area. We decompose output movements into the contributions of four economic wedges, affecting the production technology, the agents’ intra- and intertemporal choices, and the aggregate resource constraint. We next analyze the observed cross-country differences in business cycles with respect to these four identified wedges. Our results indicate that business cycles in the CEE countries do differ from those observed in the euro area, even though substantial convergence has been achieved after the eastern EU enlargement. The major differences concern the importance of the intra- and intertemporal wedges, which account for a larger proportion of output fluctuations in the CEE region and also exhibit relatively little comovement with their euro area counterparts.