Thesis (Selection of subject)Thesis (Selection of subject)(version: 368)
Thesis details
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Financial Frictions and Macroprudential Policy
Thesis title in Czech: Finanční frikce a makroprudenční politika
Thesis title in English: Financial Frictions and Macroprudential Policy
Academic year of topic announcement: 2012/2013
Thesis type: diploma thesis
Thesis language: angličtina
Department: Institute of Economic Studies (23-IES)
Supervisor: PhDr. Jaromír Baxa, Ph.D.
Author: hidden - assigned by the advisor
Date of registration: 17.05.2012
Date of assignment: 17.05.2012
Guidelines
The thesis will be divided into three parts.
In the first part the main approaches to financial frictions modelling within DSGE models will be outlined. The main approaches are: credit channel as described in Bernanke et al. (1999) so called BGG model, collateral constraint Kiyotaki and Moore (1997) and banking sector modelling Christiano et al. (2010). BGG model will be studied in greater detail as it will be used extensively in subsequent sections.
In the second part MS-DSGE model with financial frictions for open economy based on Christiano et al. (2007) will be constructed. Model will be calibrated for UK economy and if time permits estimated using Bayesian techniques. Detail discussion and IR functions for various shocks as well as model implications will be provided.
In the last part I will characterize the main objectives and tools of Macroprudential policy, provide overview of literature and use the MS-DSGE model constructed in the previous part for Macroprudential policy impacts and costs analysis.

Hypotheses:
1. Shocks to financial markets are the main determinants of economic fluctuations
2. Financial frictions amplify shocks to the real economy
3. Reasonable macroprudential policy can decrease the impacts of shocks to financial markets. Benefits of such policy are higher than short-term costs

Outline:
1. Literature overview
2. Main approaches to financial frictions modelling.
3. MS-DSGE model with financial frictions
a. Construction
b. Calibration
c. Estimation using Bayesian techniques (if time permits)
d. Results and implications
4. Macroprudential policy
a. Description
b. Analysis
5. Conclusion
References
[1] Andrés, J. and Óscar J. Arce (2009). Banking competition, housing prices and macroeconomic stability. Banco de España Working Papers 0830, Banco de España.

[2] Bernanke, B., Gertler, M., and Gilchrist, S. (1999). The Financial Accelerator in a Quantitative Business Cycle Framework. Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.

[3] Brazdik, F., Hlavacek, M., and Marsal, A. (2011). Survey of Research on Financial Sector Modelling within DSGE Models: What Central Banks Can Learn from it. Research and policy notes, Czech National Bank.

[4] Christensen, I., Corrigan, P., Mendicino, C., and Nishiyama, S.-I. (2007). An Estimated Open-Economy General Equilibrium Model with Housing Investment and Financial Frictions., mimeo

[5] Christiano, L., Motto, R., and Rostagno, M. (2010). Financial factors in economic fluctuations. Working Paper Series 1192, European Central Bank.

[6] DeJong, D. and Dave, C. (2011). Structural Macroeconometrics: (Second Edition). Princeton University Press.

[7] Iacoviello, M. (2005). House prices, borrowing constraints, and monetary policy in the business cycle. American Economic Review, 95(3):739 764.

[8] Gabriele Galati, G. and Moessner,R. (2011). Macroprudential policy – literature review, BIS Working Paper No 337, Bank for International Settlements

[9] Kiyotaki, N. and Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2):211 48.

[10] Modigliani, F. and Miller, M. H. (1958). The cost of capital, corporation finance and the theory
of investment. The American Economic Review, 48(3):261 297.
Preliminary scope of work
The recent financial crisis has highlighted the need to include financial frictions into standard DSGE models. Until recent crisis it was thought that financial markets are efficient and there is information symmetry between lenders and borrowers or if some frictions in the financial markets exist, their impact is negligible. This assumption is often justified by theory developed in Modigliani and Miller (1958), which roughly speaking says that in perfect world the value of firm is unaffected by how that firm is financed. Crisis in 1997 and 2008 challenged the assumption about perfect financial markets. In my thesis I will construct DSGE model with financial frictions and banking sector, calibrate and estimate it for UK economy. I will then use this estimated model for Macroprudential policy analysis. My main contribution is to include heterogeneous households into rich financial sector and use such model for Macroprudential policy analysis.
Preliminary scope of work in English
The recent financial crisis has highlighted the need to include financial frictions into standard DSGE models. Until recent crisis it was thought that financial markets are efficient and there is information symmetry between lenders and borrowers or if some frictions in the financial markets exist, their impact is negligible. This assumption is often justified by theory developed in Modigliani and Miller (1958), which roughly speaking says that in perfect world the value of firm is unaffected by how that firm is financed. Crisis in 1997 and 2008 challenged the assumption about perfect financial markets. In my thesis I will construct DSGE model with financial frictions and banking sector, calibrate and estimate it for UK economy. I will then use this estimated model for Macroprudential policy analysis. My main contribution is to include heterogeneous households into rich financial sector and use such model for Macroprudential policy analysis.
 
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