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The euro area’s pandemic recession: A DSGE-based interpretation

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  • Cardani, Roberta
  • Croitorov, Olga
  • Giovannini, Massimo
  • Pfeiffer, Philipp
  • Ratto, Marco
  • Vogel, Lukas

Abstract

This paper augments the European Commission’s open-economy DSGE model (GM) with COVID-specific shocks (‘forced savings’, labour hoarding) and financially-constrained investors to account for the extreme volatility of private domestic demand and hours worked during COVID-19, and it estimates the model on euro area data for the period 1998q4–2021q4. It takes a pragmatic approach of adapting the workhorse model of a policy institution to COVID-19 data. ‘Forced savings’ are central to explain quarterly real GDP growth during the pandemic, complemented by contributions from foreign demand and trade, and the negative impact of persistently higher savings after the first wave. We provide extensive model validation, including a comparison to off-model evidence for COVID-related restrictions, and a comparison of different model specifications.

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  • Cardani, Roberta & Croitorov, Olga & Giovannini, Massimo & Pfeiffer, Philipp & Ratto, Marco & Vogel, Lukas, 2022. "The euro area’s pandemic recession: A DSGE-based interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:dyncon:v:143:y:2022:i:c:s0165188922002160
    DOI: 10.1016/j.jedc.2022.104512
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    Cited by:

    1. Cardani, Roberta & Pfeiffer, Philipp & Ratto, Marco & Vogel, Lukas, 2023. "The COVID-19 recession on both sides of the Atlantic: A model-based comparison," European Economic Review, Elsevier, vol. 158(C).
    2. Omotosho, Babatunde S. & Yang, Bo, 2024. "Oil price shocks and macroeconomic dynamics in resource-rich emerging economies under regime shifts," Journal of International Money and Finance, Elsevier, vol. 144(C).
    3. Melina, Giovanni & Villa, Stefania, 2023. "Drivers of large recessions and monetary policy responses," Journal of International Money and Finance, Elsevier, vol. 137(C).
    4. Alexandre Kornelius & Jose Angelo Divino, 2024. "Renewable Energy Shocks and Business Cycle Dynamics with Application to Brazil," Working Papers Series 592, Central Bank of Brazil, Research Department.
    5. Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2024. "Unusual shocks in our usual models," Journal of Monetary Economics, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    COVID-19; Estimated DSGE model; Euro area; Recession; Forced savings;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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