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

Abstract: 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)
Pages: 39
Date: 2018-11, Revised 2018-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
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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