Limited Asset Market Participation and the Euro Area Crisis: An Empirical DSGE Model

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Title: Limited Asset Market Participation and the Euro Area Crisis: An Empirical DSGE Model
Authors: Albonico, Alice
Paccagnini, Alessia
Tirelli, Patrizio
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Date: 13-Apr-2019
Online since: 2019-04-25T07:43:30Z
Abstract: We estimate a medium‐scale dynamic stochastic general equilibrium model for the Euro area with limited asset market participation (LAMP). Our results suggest that in the recent European Monetary Union years LAMP is particularly sizable (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 representative agent 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 the 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.
Funding Details: European Commission - Seventh Framework Programme (FP7)
Type of material: Journal Article
Publisher: Wiley
Journal: Economic Inquiry
Copyright (published version): 2019 Western Economic Association International
Keywords: DGSELimited asset market participationBayesian EstimationEuro areaBusiness Cycle
DOI: 10.1111/ecin.12791
Language: en
Status of Item: Peer reviewed
Appears in Collections:Business Research Collection

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