In the Smets-Wouters DSGE model, the financial friction is introduced by a(n):
A) "wedge" between consumer interest rates and the federal funds rate
B) discount rate greater than one
C) large risk premium
D) monetary policy parameter ( $\bar { m }$ ) equal to zero
E) breakdown in the Taylor rule

Question

Quizplus · Accepted Answer

The Smets-Wouters DSGE model introduces financial friction through a "wedge" between consumer interest rates and the federal funds rate, capturing the impact of financial market imperfections on the economy.

In the Smets-Wouters DSGE Model, the Financial Friction Is Introduced mˉ\bar { m }mˉ

In the Smets-Wouters DSGE Model, the Financial Friction Is Introduced $\bar { m }$