Description

We suggest a new approach for analyzing the role of financial variables and shocks incomputing the output gap. We estimate a two-region DSGE model for the euro area, withfinancial frictions at the household level, between 2000-2013. After joining the monetaryunion, a decline in some countries’ borrowing costs contributed to a credit, housing and realboom and bust cycle. We show that financial frictions amplified economic fluctuations andthe measure of the output gap in those countries. On the contrary, in countries such as Franceand Germany, financial frictions played a minor role in output gap measures. We also presentevidence of the trade-offs faced by the European Central Bank when trying to stabilize tworegions in a currency union with unsynchronized economic cycles.

More publications in this series: Working Papers

More publications by: Pau Rabanal ; Marzie Taheri Sanjani