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Working Paper

Estimating Contract Indexation in a Financial Accelerator Model

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This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.
Topics
Econometrics modeling and forecasting
10.01.2013ISSN 2573-7953 WP 12-16ROriginal Paper WP 12-16DOI 10.26509/frbc-wp-201216r
Keywords agency costs, financial accelerator, business cycles
JEL Classification Codes E32, E44

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Carlstrom, Charles T., Timothy S. Fuerst, Alberto Ortiz, and Matthius Paustian. 2013. “Estimating Contract Indexation in a Financial Accelerator Model.” Federal Reserve Bank of Cleveland, Working Paper No. 12-16R. https://doi.org/10.26509/frbc-wp-201216r