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

39 Pages Posted: 26 Nov 2018

See all articles by Alice Albonico

Alice Albonico

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Alessia Paccagnini

University College Dublin (UCD) - Michael Smurfit Graduate School of Business; Australian National University (ANU) - Crawford School of Public Policy

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2018

Abstract

We estimate a medium scale DSGE model for the Euro area with Limited Asset Market Participation (LAMP). Our results suggest that in the recent EMU years LAMP is particularly sizeable (393 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 RA 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 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.

Keywords: DSGE, Limited Asset Market Participation, Bayesian Estimation, Euro Area, Business Cycle

JEL Classification: C11, C13, C32, E21, E32, E37

Suggested Citation

Albonico, Alice and Paccagnini, Alessia and Tirelli, Patrizio, Limited Asset Market Participation and the Euro Area Crisis. An Empirical DSGE Model (November 15, 2018). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 391, Available at SSRN: https://ssrn.com/abstract=3285115 or http://dx.doi.org/10.2139/ssrn.3285115

Alice Albonico

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Alessia Paccagnini

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Patrizio Tirelli (Contact Author)

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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