Dear Johannes,

In my DSGE model, I have used a financial shock to perturb firms’ external borrowing capacity(collateral for loan+equity issuance), this financial shock represents both a shock to both collateral for loans and equity issuance, and this financial shock originates from financial frictions influencing collateral for loans and equity issuance, I am wondering that does this shock belong to fundamental or non-fundamental shock?

Thank you very much and look forward to hearing from you.

Best regards,

Jesse

What do you mean with

?

I mean non-fundamental shock represent shocks inducing excess volatility of asset prices like the sentiment shock, fundamental shock means shocks perturbing fundamental value of asset prices, therefore, since the financial shock perturbs firms’ borrowing capacity (perturbing firms’ collateral for borrowing and equity issuance), should financial shock belong to fundamental shock or non-fundamental sock?

Thank you very much and look forward to hearing from you.

That depends on the interpretation you are giving the shock. If the shock proxies actual changes in the value of capital, you may consider it fundamental. But if you consider these changes in the value of collateral as driven by e.g. sentiment swings, they may be seens as nonfundamental.

Thank you very much! The sentiment shock Vst drives stock bubble evolution and is considered as the non-fundamental shock. However, there is another shock in my model called the financial shock Vft, and the financial shock perturbs the borrowing capacity of firm, e.g. the maximum loans that a firm can apply for is not greater than physical capital (Kt) multiplied by Tobin’s Qt and multiplied by the financial shock Vft: Lt+1/Rt<=KtQtVft, where Lt+1 is loan, Rt is loan interest rate, Kt is capital, Qt is capital’s shadow price, Vft is the financial shock, is the financial shock Vft fundamental or nonfundamental?

Thank you very much and look forward to hearing from you.

Again, that depends on the interpretation you assign to that shock. Is the borrowing capacity perturbed for fundamental or non-fundamental reasons. Given that this is an exogenous process, nothing in the model will provide you the answer.