The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model

This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively

Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models?

Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened

Adjustment dynamics and business cycle heterogeneity in the EMU: Evidence from estimated DSGE models

The paper reviews adjustment dynamics in the EMU on the basis of estimated DSGE models for four large EA Member States (DE, FR, IT, ES). We compare the response of the four countries to identical shocks and find a particularly strong response of employment and wages in ES, a high sensitivity of IT to investment-related shocks, and a comparatively strong impact of global shocks on the DE economy. We also perform counterfactual exercises that apply the estimated shocks and parameters for ES to DE, FR, and IT. The counterfactual simulations suggest that differences in shocks have been important for GDP growth differentials, and together with structural differences also contributed to differences in employment fluctuations across the four countries considered.JRC.B.1-Finance and Econom

Comparing post-crisis dynamics across Euro Area countries with the Global Multi-country model

Abstract Following the global financial crisis, the Euro Area (EA) has experienced a persistent slump and notable trade balance adjustments, but with pronounced differences across EA Member States. We estimate a multi-country structural macroeconomic model to assess and compare the main drivers of GDP growth and trade balance adjustment across Germany, France, Italy, and Spain. We find that the pronounced post-crisis slump in Italy and Spain was mainly driven by positive saving shocks ('deleveraging') and by an increase in investment and intra-euro risk premia. Fiscal austerity in Spain and the productivity slowdown in Italy have been additional sizable contributors to the economic downturn. The results further suggest that euro depreciation, heightened intra-euro risk premia and subdued investment had a sizable impact on the trade balance reversals in Italy and Spain, which has been offset in France by a strong increase in imports and lower exports

Is fiscal devaluation welfare enhancing?

Due to the experience of large external imbalances and misaligned real exchange rates within the euro area, the concept of fiscal devaluation has gained increasing attention, which mimics the effects of external devaluation in the absence of flexible nominal exchange rates and an independent monetary policy. This paper uses a small open economy model with nominal wage and price rigidities to analyse the welfare effects of fiscal devaluation, understood as budgetary-neutral tax shift from employers’ social security contributions towards consumption tax. The paper finds that fiscal devaluation can support external rebalancing by accelerating real exchange rate adjustments and regaining price competitiveness. From a household welfare perspective, internal devaluation with its concomitant worsening of the terms of trade tends to induce welfare losses. The overall welfare effects are pro-cyclical in the sense that the stronger the tax shift, the higher the welfare losses for the average household. The losses increase with the openness of the economy and the relative size of the tradable sector. In the presence of supply shocks, however, fiscal devaluation can imply small welfare gains. A scenario with flexible nominal exchange rates and autonomous monetary policy performs better in terms of household welfare, but implies stronger external fluctuations in the short run.JRC.G.1-Financial and Economic Analysi

Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models: JRC Working Paper in Economics and Finance N. 2020/5

Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened.JRC.B.1-Finance and Econom

Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models?

Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened

Domestic Versus Foreign Drivers Of Trade (Im)Balances: How Robust Is Evidence From Estimated DSGE Models

Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened