1. The Post-Crisis Slump in the Euro Area (EA) and the US: Evidence From an Estimated Three-Region DSGE Model
(European Economic Review, 2016, Vol.88, pp )
Robert Kollmann1,2; Beatrice Pataracchia3; Rafal Raciborski4; Marco Ratto3; Werner Roeger4; Lukas Vogel4
1Université Libre de Bruxelles; 2CEPR; 3European Commission, JRC; 4European Commission, DG-ECFIN
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Historical Decomposition: EA GDP growth (y-o-y)
Abstract
●Global financial crisis ( ) led to sharp contraction in Euro Area (EA) and US real activity, and was followed by long-lasting slump
● Striking post-crisis differences between EA & US:
EA slump markedly more protracted
● We estimate a 3-region model (EA, US, Rest of World), 1999q1-2014q4, to quantify the drivers of the divergent EA and US adjustment paths
●Before crisis: EA investment boom
● :
- EA investment risk premium 
- EA TFP 
- Negative trade shocks
●2010: Recovery, EA risk premium 
●After 2010:
-EA risk premium  (sovereign debt crisis)
- Less important:
Fiscal policy
Price and wage markup shocks
Household saving shocks
Euro risk premium
Euro Area & US Macroecon. & Financial Conditions
►More persistent fall in EA GDP & TFP growth
►EA employment rate remains low
►EA Investment/GDP ratio trends down
►Inflation lower in EA than in US
Bank health after 2010: worsens in EA, improves in US
►Rise in EA non-performing loans
►EA credit continues to tighten
Historical Decomposition: US GDP growth (y-o-y)
●Pre-crisis boom: low investment risk premium was key driver
● :
- US investment risk premium 
- Saving shocks
- Price mark-up shocks; monetary policy; Rest-of-World (ROW) shocks
● After 2010:
- Investment risk premium normalizes in US
Conclusion
►Financial shocks were key drivers of the Great Recession, in EA and US
►EA post-crisis slump: combination of adverse supply and demand shocks
● Negative TFP shocks
● Negative investment shocks, linked to persistent weakness of EA banks
►Adverse financial shocks less persistent in US
►Fiscal policy (austerity) not key for EA slump
► Low post-crisis EA inflation: largely driven by fall in markups (and by weak aggregate demand)  
Research Method
ESTIMATED 3-region DSGE model (EA, US, Rest-of-World)
► EA & US blocks: same structure (very detailed)
► 58 shocks, 53 observables
► Nominal & real rigidities
► Financially constrained & unconstrained households
► Distorting taxes, government debt
► Investment risk premium shocks: exogenous investment wedges (capture intermediation frictions and/or bubbles)
Impulse Responses
Positive permanent EA TFP shock
Persistent fall in TFP:
●Triggers persistent fall in GDP & I
●But can’t explain fall in inflation & I/Y
●Can’t explain EA TB improvement
This shock alone cannot explain data; need combination of shocks
Positive EA invest. risk premium shock
● Lowers Y, I/Y and Labor (persistently)
● But: C is crowded in by this shock
Related Literature
There is little other model-based empirical work on EA post-crisis slump
Prominent views about sources of persistent slump:
►Restrictive fiscal policy (austerity): e.g. De Grauwe (2014), Stiglitz (2015)
We find: fiscal policy had minor influence
►Financial constraints for investors: e.g. Kalemli-Özcan et al. (2015)
Consistent with our findings
►Rigidities in product & labor markets: e.g. Fernald (2015). We find: rigidities
explain EA vs. US differences in price & wage adjustment + post-crisis rise in EA wage share
►Other estimated DSGE studies on US post-crisis slump use closed economy models: Christiano et al. (2015), Fratto and Uhlig (2015), Lindé et al. (2015), Del Negro et al. (2015).
We use open economy model & find significant role for foreign shocks