Working Paper: CEPR ID: DP11121
Authors: Robert Kollmann; Beatrice Pataracchia; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel
Abstract: The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems.
Keywords: postcrisis slump; euro area; united states; estimated DSGE model; demand and supply shocks; financial shocks
JEL Codes: F4; F3; E2; E3; E5; E6; C5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial shocks (F65) | 2008-09 recession in EA (F44) |
| Financial shocks (F65) | 2008-09 recession in US (F44) |
| Adverse aggregate demand and supply shocks (E00) | post-2009 slump in EA (F44) |
| Lower productivity growth (O49) | post-2009 slump in EA (F44) |
| Persistent adverse shocks to capital investment (E22) | post-2009 slump in EA (F44) |
| Negative shocks to TFP growth (O49) | slow recovery in EA (O52) |
| Increased capital investment risk premiums (G31) | slow recovery in EA (O52) |
| Improvements in financial system health (G28) | faster rebound in US (E65) |
| More resilient private consumption (E21) | faster rebound in US (E65) |
| Fiscal austerity (E62) | delay in EA's recovery (C22) |
| Differences in impacts of financial and economic shocks (F65) | differences in post-crisis dynamics between EA and US (F44) |
| Persistence of adverse shocks (E32) | protracted adjustment in EA (F32) |