In the Smets-Wouters DSGE Model, the Financial Friction Is Introduced

question 13

Multiple Choice

In the Smets-Wouters DSGE model, the financial friction is introduced by a:

• 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 ( ) equal to zero.
• E) breakdown in the Taylor rule.

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Definitions:

High Water Mark

A clause in fund management contracts that prevents fund managers from receiving large bonuses for poor performance, ensuring they only earn a performance fee when the fund's value exceeds its previous highest value.

Incentive Fees

Fees paid to a fund manager based on performance, often as a percentage of the investment gains beyond a specified benchmark.

Hedge Fund Manager

An individual or firm responsible for making investment decisions in a hedge fund to maximize returns and minimize risks.

Survivorship Bias

The error of focusing only on the entities that have survived some process and overlooking those that have failed.