Financial Factors: Implications for Output Gaps

July 14, 2015

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Format: Chicago

Pau Rabanal, and Marzie Taheri Sanjani. Financial Factors: Implications for Output Gaps, (USA: International Monetary Fund, 2015) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Housing, Housing prices, Inflation, National accounts, Output gap, Potential output, Prices, Production

Keywords: Bayesian Estimation, Core output gap, Financial Frictions, Global, House price, Housing, Housing demand shocks, Housing price fluctuation, Housing prices, Housing stock, Inflation, Monetary policy shock, Monetary Union, Output Gap, Potential output, Preference shock, WP

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/153
Stock No:

WPIEA2015153
ISBN:

9781513512860
ISSN:

1018-5941

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