We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some...

Intro -- Contents -- I. INTRODUCTION -- II. THE MODEL -- III. EXTENSIONS TO THE BASELINE MODEL -- IV. ESTIMATION AND MODEL COMPARISON -- V. RESULTS -- VI. CONCLUDING REMARKS -- APPENDIX: THE METROPOLIS-HASTINGS ALGORITHM -- REFERENCES.

We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results...

We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some...