Description

This paper presents a dynamic stochastic general equilibrium (DSGE) model built with a focus on frictional financial intermediation. The model, estimated for the Chilean economy, expands the quantitative analysis toolkit of the Central Bank of Chile, allowing for the study of how financial frictions shape the transmission mechanisms of several macroeconomic and financial shocks. The model builds on a simplified version of the Central Bank of Chile’s main DSGE model, described in Garcia et al. (2019), augmented to include a rich financial sector and financial frictions. The extensions include optimizing financial intermediaries, corporate and mortgage lending, long-term government bonds within a segmented bonds market, and the possibility for households, firms, and banks to default. The result is the Central Bank of Chile’s Macro Financial Model. The model captures many features of the Chilean economy and allows for a quantitative analysis of the financial system’s role in explaining the business cycle and of the interaction between the real and financial sides of the economy.