Limited Asset Market Participation and the Euro Area Crisis. An Empirical DSGE Model
Alice Albonico (),
Alessia Paccagnini and
Patrizio Tirelli ()
No 391, Working Papers from University of Milano-Bicocca, Department of Economics
We estimate a medium scale DSGE model for the Euro area with Limited Asset Market Participation (LAMP). Our results suggest that in the recent EMU years LAMP is particularly sizeable (39% during 1993-2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP model is preferred to its representative household counterpart. In the RA model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP model this role is played by the investment-specific shock, because Non-Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect contractionary role of monetary policy shocks during the post-2007 years. In this period consumption of Non-Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance.
Keywords: DSGE; Limited Asset Market Participation; Bayesian Estimation; Euro Area; Business Cycle (search for similar items in EconPapers)
JEL-codes: C11 C13 C32 E21 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-11, Revised 2018-11
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Journal Article: LIMITED ASSET MARKET PARTICIPATION AND THE EURO AREA CRISIS: AN EMPIRICAL DSGE MODEL (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:391
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