The relevance of financial frictions in V4 countries from the DSGE perspective

Abstract

In this paper, the importance of the financial frictions in the countries of the Visegrád Group is compared using a set of estimated DSGE models with a financial accelerator. The results of the Bayesian estimation confirm the overall similarity of the V4 economies, with some notable differences. The estimates of the financial friction parameters are very similar across the V4 economies, which may be explained by the fact that most commercial banks operating in these economies are subsidiaries of large international groups, which treat the V4 markets in similar ways. According to the historical shock decomposition, the importance of the net worth shock for the development of real output is comparable to that of the domestic productivity shock or the total of foreign shocks. In the case of the inflation rate, the importance of the net worth shock is comparable to the sum of the foreign shocks. Since the net worth shock directly affects the development of the interest rate spread between the policy interest rate and the client interest rates, the financial frictions can have important implications for the monetary policy. Thus, the monetary authority should take into account the factors that can affect the development of the interest rate spread in the economy and potentially reduce the efficiency of the monetary transmission.