Limited Asset Market Participation and the Euro Area Crisis: An Empirical Dsge Model

Abstract

We estimate a medium‐scale dynamic stochastic general equilibrium model for the Euro area with limited asset market participation (LAMP). Our results suggest that in the recent European Monetary Union years LAMP is particularly sizable (39% during 1993–2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP model is preferred to its representative household counterpart. In the representative agent model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP model this role is played by the investment‐specific shock, because non‐Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect the contractionary role of monetary policy shocks during the post‐2007 years. In this period consumption of non‐Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance. (JEL C11, C13, C32, E21, E32, E37)

The Interconnectedness of Stock Prices, Money, and Credit Across Time and Frequency From 1970 to 2016

“…We interpret our findings that the ECB has not targeted either stock prices or its unconventional actions as insufficient to convince investors of the incoming economic growth. In line with our interpretation, Creel et al (2016) argued that the main focus of the ECB was primarily on interest rates, and Albonico et al (2019) demonstrated that the ECB's policy was not concentrated on lending and contractionary.…”

Disentangling Civilian and Military Spending Shocks: A Bayesian DSGE Approach for the US Economy

“…Finally, the bottom panels of Figure 4 show that different monetary policies had negligible effects in the case of an increase in military spending. 7 In order to further assess the different contribution of fiscal spending shocks on aggregate output, we also performed the forecast error variance decomposition for 1, 4, 10, and 30 quarters ahead (Albonico et al 2019). Our results indicated that fiscal spending shocks had larger contributions on GDP during the post-financial liberalisation period.…”

“…Finally, we tested for the possibility of the misspecification of our DSGE model. In line with Albonico et al (2019), we estimated the DSGE-VAR counterparts (in the spirit of Del Negro and Schorfheide 2004) for the models with aggregate government spending, as well as disaggregated non-military and military expenditures in both sub-samples. Overall, our results indicated that, in both sub-samples, the benchmark models outperformed the different DSGE-VAR models.…”

The (Ir)Relevance of Rule-of-Thumb Consumers for US Business Cycle Fluctuations

“…Debortoli and Galí (2017) compare the implications for business cycles ‡uctuations between a HANK model and a simpler TANK model with ROT consumers. Identifying the three sources of heterogeneity arising in the HANK framework 1 , they show that the most important component of heterogeneity for output ‡uctuations is the consumption gap between the two types of consumers (constrained and unconstrained). Interestingly, they show that a simple TANK model, with a constant share of constrained households and no heterogeneity within either type, approximates the implications of a HANK model regarding output ‡uctuations reasonably well, thereby supporting the use of a TANK model in quantitative analysis of U.S. business cycle ‡uctuations.…”

“…Tirelli (2012, 2014) highlight the role of the interaction between the fraction of ROT and the degree of habits in consumption. Neither paper includes capital and the related frictions Albonico et al (2019). show the results for the determinacy regions of a medium-scale model with respect to both the degree of habits and its speci…cation.…”