Financial Frictions in Data: Evidence and Impact

This paper investigates financial frictions in US postwar data to understand the interactionbetween the real business cycle and the credit market. A Bayesian estimation technique isused to estimate a large Vector Autoregression and New Keynesian models demonstratinghow financial shocks can have a large and sluggish impact on the economy. I identify thedefault risk and the maturity mismatch channels of monetary policy transmission; I furtheremploy a generalized-IRF to establish countercyclicality of risk spreads; and I show that thematurity mismatch shocks produce a stronger impact than the default risk shocks.