Financial frictions and stabilisation policies
by Saira Tufail; Ather Maqsood Ahmed
Afro-Asian J. of Finance and Accounting (AAJFA), Vol. 14, No. 1, 2024

Abstract: This research examines the implications of price and quantity-based financial frictions for the macroeconomic dynamics and effectiveness of stabilisation policies in Pakistan. Price and quantity-based financial frictions are captured through external finance premium and collateral constraint, respectively. Results from calibrating a new Keynesian dynamic stochastic general equilibrium model showed that quantity-based frictions generate strong financial accelerator mechanism and impede the stabilisation through monetary, fiscal and macroprudential policies. The effective management through stabilisation policies requires the rigorous handling of quantitative financial frictions.

Online publication date: Thu, 18-Jan-2024

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