The Financial Accelerator And Monetary Policy

This paper investigate the impulses response of macroeconomic variables to exogenous shocks, especially monetary policy shock, using New--Keynsian Dynamic Stochastic General Equilibrium (DSGE) model and Vector Auto Regression (VAR) model from the theoretical and empirical perspective respectively, and make comparative analysis on the similarities and differences between the results of two models. Also explore the reason of the existing of the differences. We use these two models to analysis mainly because they have different modeling idea. The DSGE model has a rigorous microeconomic theoretical foundation, while the VAR model reveal the operation of the real economic activities from a macroeconomic perspective, so these two models can complement each other. First, we develop a DSGE model with three nominal rigid:sticky prices, capital adjustment costs and financial frictions, which is a DSGE model with the financial accelerator. After parameters calibration and model solution, we get the theoretically impulse responses of the macroeconomic variables to the monetary policy, which we can use for theoretical research. Second, we develop a DSGE model without the financial accelerator, and get impulses responses using the same method before. Then, according to the mapping between the DSGE model and VAR model, using the macroeconomic quarterly data of China, we identify the impulses responses to the monetary policy shock, and analyse China’s economic operation to the monetary policy shock. Finally, compare the results obtained from the above models, and it shows that there is financial accelerator in China. With different values, the effect of the monetary shock is much bigger. With the continuous enhancement of the financial accelerator, the effect of monetary policy is amplified, i.e., in the case of tight monetary policy, output, consumption, inflation, labor, wages, interest rates is effected bigger. Also, the impulses responses basically have the same trend, so proving that VAR model can be used as a empirical tool used by the DSGE model.The main contribution of this paper is the established of the DSGE model with the financial accelerator that can be used in China. The core is the adding of financial friction. Also, we use the minimum distance method to calibrate the parameter, for better fitting between the theoretical and empirical results.