Parsing financial fragmentation in the euro area: a multi-country DSGE perspective

Matthieu Darracq Paries, Pascal Jacquinot and Niki Papadopoulou

No 1891, Working Paper Series from European Central Bank

Abstract: The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. We design a 6-region multi-country DSGE model which provides a structural interpretation of the salient features of these developments. The model spans the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Ger- many, France, Italy, Spain, and rest-of-euro area. We construct three stylised macro-financial scenarios as a synopsis of the euro area financial crisis and argue that the adverse interactions between sovereign, banking and corporate risk, can account to a large extent for the financial repression and poor economic performance observed in some parts of the euro area. JEL Classification: E4, E5, F4

Keywords: banking; bank lending rates; cross-country spillovers; DSGE models; financial regulation (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mon and nep-opm
Note: 604093
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20161891

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