Financial Factors: Implications for Output Gaps
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Summary:
We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some countries’ borrowing costs contributed to a credit, housing and real boom and bust cycle. We show that financial frictions amplified economic fluctuations and the measure of the output gap in those countries. On the contrary, in countries such as France and Germany, financial frictions played a minor role in output gap measures. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with unsynchronized economic cycles.
Series:
Working Paper No. 2015/153
Subject:
Housing Housing prices Inflation National accounts Output gap Potential output Prices Production
English
Publication Date:
July 14, 2015
ISBN/ISSN:
9781513512860/1018-5941
Stock No:
WPIEA2015153
Pages:
57
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