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Selim Elekdag is an Economist in the Policy Development and Review Department, Alejandro Justiniano is an Economist in the Western Hemisphere Department, and Ivan Tchakarov is an Economist in the Asia and Pacific Department. We are grateful to Gian Maria Milesi-Ferretti, Douglas Laxton, Alessandro Rebucci, and other colleagues in the Research Department of the International Monetary Fund for helpful comments and discussions.
In fact, the correlation of real GDP growth and the EMBI spread for Korea was -0.33 during the sample spanning the fourth quarter of 1997 to the fourth quarter of 2000. Recall that the EMBI spread for Korea was not calculated before the fourth quarter of 1997.
To ease exposition, we sometimes refer to the combination of the financial accelerator channel and existence of foreign currency denominated debt as collateral constraints. We also abuse this convention and sometimes refer to the financial accelerator with the understanding that (entrepreneurial) debt is always denominated in foreign currency.
Furthermore, as emphasized by Smets and Wouters (2003), the use of Bayesian methods provides greater stability to maximum likelihood algorithms for the estimation of the parameters.
As is shown in Table 2, we estimate the 10th and 90th percentiles to be 0.039 and 0.097, respectively.
To be discussed below.
with εcpt can be interpreted as a cost-push shock to price inflation.
Capital is assumed to depreciate completely in production.
Equivalently, we could have used the leverage ratio–also referred to as the (foreign) debt-to-equity ratio–defined as sD/pN, based on qK/pN = 1 + sD/pN as implied by equation 16.
Actually, it is the cost associated with monitoring and is an increasing function of the risk premium. See Cespedes, Chang, and Velasco (2004) which is what our presentation is based on. Furthermore, Gerter, Gilchrist, and Natalucci (2003) provides additional details as well as novel extensions. Finally, see Bernanke, Gertler, and Gilchrist (1999) for the full exposition.
Where εδt could be interpreted as a shock to the discount rate of the entrepreneurs. In the text we refer to this as a bankruptcy shock, see Gertler, Gilchrist, and Natalucci (2003) for an analogous interpretation.
There are also clear advantages when it comes to model comparisons, since the models are not required to be nested and numerical methods for the computation of the marginal likelihood permit constructing posterior model probabilities. These probabilities can in turn be used for model averaging, thereby producing parameter estimates which explicitly incorporate model uncertainty.
All series are extracted from Datastream international.
Note, nonetheless, that we use observations from 1988-1989 for the initialization of the Kalman filter, although these observations are not used in the computation of the likelihood and the estimation of the parameters. Future extensions to this paper will consider a longer sample.
It might be argued that we should have restricted ourselves to only either a period of pure float or a managed float. Markov switching methods might allow for incorporating the transition to an alternative exchange rate policy; however, our limited sample prevents us from considering the estimation of the model under these two scenarios. Furthermore, this would require a nonlinear model for estimation. See Schorfheide (2003) for further details.
Below—to assess robustness—we consider the case of a prior with values even closer to zero.
If we consider the one standard deviation bands for both k and ν, these priors would imply that the risk premium is approximately between 5 and 28 percent.
Relatedly, work is under way on incorporating stochastic volatility in the estimation of DSGE models.
In fact, the correlation of real gross fixed capital formation growth and the EMBI spread for Korea was -0.37 during the sample spanning the fourth quarter of 1997 to the fourth quarter of 2000. Recall that the EMBI spread for Korea was not calculated before the fourth quarter of 1997.
We defer however formally testing the hypothesis that ζS < 0 for future work. This is the approach in Lubik and Shorfheide (2003) who investigate, using a small open economy model, whether or not central banks target exchange rates.