The post-crisis slump in the Euro Area and the US: Evidence from an estimated three-region DSGE model

Abstract

The global financial crisis led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences-in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems.JEL Classification: F4, F3, E2, E3, E5, E6 and C5

The macroeconomic effects of quantitative easing in the euro area: Evidence from an estimated DSGE model

“…11 10 The presentation of the results focuses on the role of QE and the related parameter estimates, impulse responses and historical decompositions. Broader discussion of results can be found in Kollmann et al (2016) and the related online appendix, including predicted business-cycle statistics (standard deviations and cross-correlations of key macro variables); these statistics are broadly consistent with empirical statistics. 11 The prior mean for g b is smaller, but in line with two other DSGE studies focusing on US Fed QE: De Graeve and Theodoridis (2016) choose a prior mean of 0.05 for the elasticity of the term spread to bond supply; Chen et al (2012) choose a prior mean of 0.015.…”

“…The present analysis uses a modified two-region (EA and RoW) framework of Kollmann et al (2016) and extends this model to incorporate non-standard monetary policy. The model is estimated using quarterly data for the period 1999q1-2017q1.…”

“…The exposition below describes the QE-relevant extensions. A detailed overview of the general model can be found in Kollmann et al (2016) and in the online appendix. We extend the model by introducing non-standard monetary policy as in Priftis and Vogel (2016).…”

“…We choose priors for the non-QE related elements according to the nested model of Kollmann et al (2016). It is crucial that the parameter on portfolio adjustment costs ( g b ) be identified accurately, as it determines the impact of QE on the spread between short-term and long-term bond yields in the model.…”

PIIGS in the Euro Area. An Empirical DSGE Model

“…Our contribution is complementary to Kollmann et al (2016) who investigate the post-crisis adjustment in the US and in the Eurozone in a medium scale DSGE model, …nding that adverse shocks to productivity growth were relatively more important in the Eurozone. Recent attempts to model CORE-Periphery interactions in the Eurozone have begun to incorporate the role of deleveraging e¤ects (Kushinov et al, 2016).…”