Macroeconomic Implications of Financial Frictions in the Euro Zone

Pierre Siklos

Comparative Economic Studies, 2015, vol. 57, issue 2, 222-242

Abstract: A macroeconomic model that explicitly incorporates financial sector influences is estimated. A survey of lending standards in the Eurozone countries is informative about aggregate economic activity. I also ask whether policy rate shocks influence lending standards, and whether these standards also have an effect on monetary policy. Briefly, the paper finds that inclusion of indicators of financial frictions in standard macromodels is essentials. Some of the results also suggest that in 2011–2012, the European Central Bank made financial conditions worse by not only raising the policy rate but by implementing a very gradual reduction in monetary conditions over the next 2 years.

Date: 2015
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