Untangling crises: GFC and COVID-19 through the lens of a DSGE model

Rogelio De La Peña and Ignacio García

Latin American Journal of Central Banking (previously Monetaria), 2023, vol. 4, issue 2

Abstract: In this paper, we aim to compare the anatomy of the impact of the COVID-19 outbreak and the Great Financial Crisis (GFC) in the context of an emerging market economy. To this end, we develop a small open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition. Then, we estimate this model to explore and compare both crises in the Mexican business cycle. The decomposition obtained with the model shows that: (i) the financial shocks were the main source of contraction of the output gap (around 49.0%) in the GFC; (ii) the dynamic of the GDP had been severely affected by the demand shock (around 45.1%), the financial shocks (32.2%), and the productivity shock (22.3%) in the COVID-19 pandemic. The results suggest that the main forces of the recent contraction in economic activity in Mexico were larger in absolute terms and more diverse than those observed during the GFC. This analysis illustrates the differences between the two great crises and it evaluates the policy response to each.

Keywords: COVID-19; GFC; Bayasian estimation; Financial frictions; Business cycle; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 G20 G21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:lajcba:v:4:y:2023:i:2:s2666143823000121

DOI: 10.1016/j.latcb.2023.100091

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