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Could the boom-bust in the eurozone periphery have been prevented?

Author

Listed:
  • Marcin Bielecki

    (Narodowy Bank Polski, University of Warsaw)

  • Michał Brzoza-Brzezina

    (Narodowy Bank Polski, Warsaw School of Economics)

  • Marcin Kolasa

    (Narodowy Bank Polski, Warsaw School of Economics)

  • Krzysztof Makarski

    (Narodowy Bank Polski, Warsaw School of Economics)

Abstract

Boom-bust cycles in the eurozone periphery almost toppled the common currency and recent experience suggests that they may return soon. We check whether monetary or macroprudential policy could have prevented the periphery’s violent boom and bust after the euro adoption. We estimate a DSGE model for the two euro area regions, core and periphery, and conduct a series of historical counterfactual experiments in which monetary and macroprudential policy follow optimized rules that use area-wide welfare as the criterion. We show that common monetary policy could have better stabilized output in both regions, but not the housing market or the periphery’s trade balance.In contrast, region-specific macroprudential policy could have substantially smoothed the credit cycle in the periphery and reduced the build-up of external imbalances.

Suggested Citation

  • Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa & Krzysztof Makarski, 2017. "Could the boom-bust in the eurozone periphery have been prevented?," NBP Working Papers 263, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:263
    Note: We would like to thank the participants of the NBP-NBU conference in Kyiv, Computing in Economics and Finance conference in Bordeaux, Dynare conference in Rome, European Economic Association Annual Meeting in Geneva, NBP-Deutsche Bundesbank Workshop in Kraków and Schumpeter Seminar at the Humboldt University in Berlin for useful comments.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bluwstein, Kristina & Brzoza-Brzezina, Michał & Gelain, Paolo & Kolasa, Marcin, 2018. "Multi-period loans, occasionally binding constraints and Monetary policy: a quantitative evaluation," Bank of England working papers 749, Bank of England.
    2. Bielecki, Marcin & Stähler, Nikolai, 2018. "Labor tax reductions in Europe: The role of property taxation," Discussion Papers 30/2018, Deutsche Bundesbank.
    3. Stähler, Nikolai, 2019. "Who benefits from using property taxes to finance a labor tax wedge reduction?," Discussion Papers 03/2019, Deutsche Bundesbank.

    More about this item

    Keywords

    euro-area imbalances; monetary policy; macroprudential policy; Bayesian estimation;

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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