Untangling crises: GFC and COVID-19 through the lens of a DSGE model

In this paper, we aim to compare the anatomy of the impact of the COVID-19 outbreak and the Great Financial Crisis (GFC) in the context of an emerging market economy. To this end, we develop a small open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features finan...

Full description

Bibliographic Details
Main Authors: Rogelio De La Peña, Ignacio García
Format: Article
Language:English
Published: Elsevier 2023-06-01
Series:Latin American Journal of Central Banking
Subjects:
Online Access:http://www.sciencedirect.com/science/article/pii/S2666143823000121
_version_ 1797807171521478656
author Rogelio De La Peña
Ignacio García
author_facet Rogelio De La Peña
Ignacio García
author_sort Rogelio De La Peña
collection DOAJ
description In this paper, we aim to compare the anatomy of the impact of the COVID-19 outbreak and the Great Financial Crisis (GFC) in the context of an emerging market economy. To this end, we develop a small open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition. Then, we estimate this model to explore and compare both crises in the Mexican business cycle. The decomposition obtained with the model shows that: (i) the financial shocks were the main source of contraction of the output gap (around 49.0%) in the GFC; (ii) the dynamic of the GDP had been severely affected by the demand shock (around 45.1%), the financial shocks (32.2%), and the productivity shock (22.3%) in the COVID-19 pandemic. The results suggest that the main forces of the recent contraction in economic activity in Mexico were larger in absolute terms and more diverse than those observed during the GFC. This analysis illustrates the differences between the two great crises and it evaluates the policy response to each.
first_indexed 2024-03-13T06:18:33Z
format Article
id doaj.art-4e7844d233f442ea85643646e2ae41a9
institution Directory Open Access Journal
issn 2666-1438
language English
last_indexed 2024-03-13T06:18:33Z
publishDate 2023-06-01
publisher Elsevier
record_format Article
series Latin American Journal of Central Banking
spelling doaj.art-4e7844d233f442ea85643646e2ae41a92023-06-10T04:28:34ZengElsevierLatin American Journal of Central Banking2666-14382023-06-0142100091Untangling crises: GFC and COVID-19 through the lens of a DSGE modelRogelio De La Peña0Ignacio García1Economic Research Department, Santander Bank, Prol. P.º de la Reforma 500, Santa Fe, Álvaro Obregón, 01376 Ciudad de México, CDMX; Corresponding author.Public Credit Unit, Ministry of Finance, Av. Insurgentes Sur 1971, Guadalupe Inn, Álvaro Obregón, 01020 Ciudad de México, CDMXIn this paper, we aim to compare the anatomy of the impact of the COVID-19 outbreak and the Great Financial Crisis (GFC) in the context of an emerging market economy. To this end, we develop a small open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition. Then, we estimate this model to explore and compare both crises in the Mexican business cycle. The decomposition obtained with the model shows that: (i) the financial shocks were the main source of contraction of the output gap (around 49.0%) in the GFC; (ii) the dynamic of the GDP had been severely affected by the demand shock (around 45.1%), the financial shocks (32.2%), and the productivity shock (22.3%) in the COVID-19 pandemic. The results suggest that the main forces of the recent contraction in economic activity in Mexico were larger in absolute terms and more diverse than those observed during the GFC. This analysis illustrates the differences between the two great crises and it evaluates the policy response to each.http://www.sciencedirect.com/science/article/pii/S2666143823000121E32E44G01G20G21
spellingShingle Rogelio De La Peña
Ignacio García
Untangling crises: GFC and COVID-19 through the lens of a DSGE model
Latin American Journal of Central Banking
E32
E44
G01
G20
G21
title Untangling crises: GFC and COVID-19 through the lens of a DSGE model
title_full Untangling crises: GFC and COVID-19 through the lens of a DSGE model
title_fullStr Untangling crises: GFC and COVID-19 through the lens of a DSGE model
title_full_unstemmed Untangling crises: GFC and COVID-19 through the lens of a DSGE model
title_short Untangling crises: GFC and COVID-19 through the lens of a DSGE model
title_sort untangling crises gfc and covid 19 through the lens of a dsge model
topic E32
E44
G01
G20
G21
url http://www.sciencedirect.com/science/article/pii/S2666143823000121
work_keys_str_mv AT rogeliodelapena untanglingcrisesgfcandcovid19throughthelensofadsgemodel
AT ignaciogarcia untanglingcrisesgfcandcovid19throughthelensofadsgemodel