In our DSGE model, financial slack features asset price misalignment and excess financial market volatility, we use stock price gap(deviation between real stock market index and its frictionless level) to proxy financial slack. Our DSGE model also have the financial and sentiment shocks, the financial shock captures shocks to frictions in firms’ external financing (collateral for debts+equity issuance), and the sentiment shock captures changes in agents’ beliefs and drives stock bubble evolution. We find monetary policy rule responds positively and significantly to financial slack proxied by the stock price gap.
Our baseline model uses the stock price gap (deviation between real stock market index and its frictionless level) to proxy financial slack. However, for robustness analysis, we are required to use a structural shock as an alternative measure for financial slack, our question is: could we use the financial shock or the sentiment shock as alternative measure to proxy financial slack in our robustness analysis for our DSGE model? Our intuition is that the financial and sentiment shocks capture stock price misalignment and excess stock market volatility, both of which are important characteristics of financial slack.
Thank you very much and look forward to hearing from you.
I cannot really answer that question, because I am not familiar with the model and setup. Even the term “financial slack” is not a standing term.