In this paper, we construct a nominal rigidities DSGE (dynamic stochastic
general equilibrium) model with financial frictions in which borrowings are
limited by collateral constraints and analyze the importance of monetary and
financial factors in Korean business cycles. After Bayesian estimation of the
model, we find the explanatory power of the model with the collateral
constraints is enhanced compared to a pure sticky price DSGE model without
financial frictions and the importance of monetary and financial factors in
Korean business cycles is well supported. With the introduction of the
collateral constraints, the propagation of technology shocks is weakened
whereas monetary shocks is more amplified due to the financial accelerator
effects. Comparing housing collateral constraints and capital collateral
constraints, we find that the capital collateral constraints are much more
important as a financial accelerator mechanism than housing collateral
constraints and the role of housing collateral constraints as a financial
accelerator mechanism is limited.