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EAGLE-FLI: A macroeconomic model of banking and financial interdependence in the euro area

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  • Bokan, N.
  • Gerali, A.
  • Gomes, S.
  • Jacquinot, P.
  • Pisani, M.

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, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country inter-bank 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 whereas firms use both domestic real estate and physical capital as collateral. 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 assessing 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 could 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.

Suggested Citation

  • Bokan, N. & Gerali, A. & Gomes, S. & Jacquinot, P. & Pisani, M., 2018. "EAGLE-FLI: A macroeconomic model of banking and financial interdependence in the euro area," Economic Modelling, Elsevier, vol. 69(C), pages 249-280.
  • Handle: RePEc:eee:ecmode:v:69:y:2018:i:c:p:249-280
    DOI: 10.1016/j.econmod.2017.09.024
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    Citations

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    Cited by:

    1. Alban Moura & Kyriacos Lambrias, 2018. "LU-EAGLE: A DSGE model for Luxembourg within the euro area and global economy," BCL working papers 122, Central Bank of Luxembourg.
    2. Rita Basto & Sandra Gomes & Diana Lima, 2018. "Exploring the implications of di erent loan-to-value macroprudential policy designs," GEE Papers 0113, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Oct 2018.
    3. repec:mth:raee88:v:10:y:2018:i:3:p:89-105 is not listed on IDEAS
    4. Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge & Wieland, Volker, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
    5. Anna Bartocci & Lorenzo Burlon & Alessandro Notarpietro & Massimiliano Pisani, 2017. "Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases," Temi di discussione (Economic working papers) 1136, Bank of Italy, Economic Research and International Relations Area.
    6. Sandra Gomes & Rita Basto & Diana Lima, 2018. "Exploring the implications of different loan-to-value macroprudential policy designs," Working Papers w201823, Banco de Portugal, Economics and Research Department.
    7. repec:ptu:bdpart:e201710 is not listed on IDEAS
    8. repec:eee:jpolmo:v:41:y:2019:i:1:p:66-83 is not listed on IDEAS

    More about this item

    Keywords

    D53; E32; E44; F45; F47; Banks; DSGE models; Financial frictions; Open-economy macroeconomics; Policy analysis;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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