Financial Factors: Implications for Output Gaps

Pau Rabanal and Marzie Taheri Sanjani

No 2015/153, IMF Working Papers from International Monetary Fund

Abstract: We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some countries’ borrowing costs contributed to a credit, housing and real boom and bust cycle. We show that financial frictions amplified economic fluctuations and the measure of the output gap in those countries. On the contrary, in countries such as France and Germany, financial frictions played a minor role in output gap measures. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with unsynchronized economic cycles.

Keywords: WP; Monetary Union; Output Gap; Financial Frictions; Bayesian Estimation; housing demand shocks; house price; monetary policy shock; core output gap; housing stock; housing price fluctuation; preference shock; Housing; Housing prices; Potential output; Inflation; Global (search for similar items in EconPapers)
Pages: 57
Date: 2015-07-14
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Citations: View citations in EconPapers (8)

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