EAGLE-FLI: A Macroeconomic Model of Banking and Financial Interdependence in the Euro Area

65 Pages Posted: 19 Jun 2016  

Nikola Bokan

University of St. Andrews - Centre for Dynamic Macroeconomic Analysis (CDMA)

Andrea Gerali

Bank of Italy

Sandra Gomes

Bank of Portugal

Pascal Jacquinot

European Central Bank (ECB)

Massimiliano Pisani

Bank of Italy

Date Written: June 17, 2016

Abstract

We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and Global Economy with Financial Linkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector can amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.

Keywords: banks, DSGE models, econometric models, financial frictions, open-economy, macroeconomics, policy analysis

JEL Classification: E51, E32, E44, F45, F47

Suggested Citation

Bokan, Nikola and Gerali, Andrea and Gomes, Sandra and Jacquinot, Pascal and Pisani, Massimiliano, EAGLE-FLI: A Macroeconomic Model of Banking and Financial Interdependence in the Euro Area (June 17, 2016). ECB Working Paper No. 1923. Available at SSRN: https://ssrn.com/abstract=2797412

Nikola Bokan (Contact Author)

University of St. Andrews - Centre for Dynamic Macroeconomic Analysis (CDMA) ( email )

Castlecliffe
St Andrews, Fife KY16 9AL
United Kingdom
+44 1334 462 445 (Phone)

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sandra Gomes

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Pascal Jacquinot

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Massimiliano Pisani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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