Policy implications and welfare analysis under the possibility of default for the Euro zone area

Christos Agiakloglou and Michael Gkouvakis

The Journal of Economic Asymmetries, 2022, vol. 25, issue C

Abstract: This study investigates the role of monetary and macro prudential policies in a DSGE model for the Euro zone area by incorporating financial frictions, a monopolistic banking sector and shocks on technology, productivity costs, housing demand and possibility of default, under a stable and a fragile economic environment. The model is solved, using a second order approximation methodology, to evaluate policy effectiveness and welfare analysis targeting to match European key macroeconomic variables for the period 2000–2018. The inclusion of the possibility of a default under this calibration framework, which is used to mimic a financial vulnerable environment, showed that the dynamics of the model change accordingly to the existing economic environment. The simple monetary rule is more effective in stabilizing the economy under a stable environment, whereas the macro prudential rule is more effective for financial stability under a fragile environment. Moreover, the macro prudential policy is the most important tool for optimizing welfare and reducing volatility for inflation and output.

Keywords: DSGE; Welfare analysis; Monetary policy; Macro prudential policy; Stable and fragile environment; Possibility of a default (search for similar items in EconPapers)
JEL-codes: E30 E44 E50 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:25:y:2022:i:c:s170349492200007x

DOI: 10.1016/j.jeca.2022.e00246

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