Assessing the losses in euro area potential productivity due to the financial crisis

Abstract

In this article, we show that the recent financial crisis has significantly affected the potential total factor productivity (TFP) of the four largest euro area economies, as well as that of the rest of the euro area. We used a reduced-form equation of TFP, based on an approach recently developed by Cahn and Saint-Guilhem (2010). Our empirical findings show that the permanent impact on potential TFP varies across countries from -3.9 points to -1.3 points in Q2 2012. When these losses are incorporated, TFP gaps develop closely in line with capacity utilization rates (CUR). Moreover, in the case of France, including CUR in our TFP model improves the quasi-real-time reliability of TFP gap estimates.

Financial Intermediation, Capital Composition and Income Stagnation: The Case of Europe

“…It stresses that financial development is a key factor in pushing TFP (Arizala et al, 2013;Han and Shen, 2015) and that financial misallocation is a factor that affects the TFP (Dias et al, 2015). In addition, research investigates the impact of the financial crisis on TFP (Chouard et al, 2014;Ollivaud and Turner, 2015;Sandliers and Wright, 2014). All in all, a large body of previous research explains that, on the one hand, financial development affects TFP growth and on the other, a financial crisis adversely affects TFP.…”

Debunking the Myth of Southern Profligacy. A DSGE Analysis of Business Cycles in the EMU's Big Four

“…In spite of the expansionary credit cycle, we …nd no evidence of a large demand-driven boom in Italy or Spain before the …nancial crisis, while in this period favorable demand shocks played an important role in Germany and France. It is interesting to note that the hypothesis of a credit-(demand-) driven boom is also rejected by Chouard et al (2014), who use a reduced-form equation of total factor productivity dynamics. As for …scal policy, we cannot …nd evidence of an expansionary bias in discretionary public consumption in the southern economies.…”

“…The parameters of the Taylor rule are normally distributed 16. Risk aversion and the inverse of Frisch elasticity are Normally distributed, whereas the parameter de…ning investment adjustment costs is Gamma distributed 17.…”

“…For the prior distributions of parameters estimated within the …rst stage, seeTable 3 17. Where applicable, parameter calibrations and prior distributions are adopted in the estimated euro area-wide model.…”