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Financial Factors

Implications for Output Gaps

Financial Factors by Pau Rabanal
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We suggest a new approach for analyzing the role of financial variables and shocks incomputing the output gap. We estimate a two-region DSGE model for the euro area, withfinancial frictions at the household level, between 2000-2013. After joining the monetaryunion, a decline in some countries' borrowing costs contributed to a credit, housing and realboom and bust cycle. We show that financial frictions amplified economic fluctuations andthe measure of the output gap in those countries. On the contrary, in countries such as Franceand Germany, financial frictions played a minor role in output gap measures. We also presentevidence of the trade-offs faced by the European Central Bank when trying to stabilize tworegions in a currency union with unsynchronized economic cycles.
International Monetary Fund; July 2015
57 pages; ISBN 9781513518602
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Title: Financial Factors
Author: Pau Rabanal; Marzie Taheri Sanjani