Households saving and financial spillovers in the Euro area

Abstract

AbstractThe aim of this paper is to study the consequences of a preference shock resulting in an increase in household savings in one country of a monetary union such as the Euro area. We study the macroeconomic effects of such a shock by developing a dynamic stochastic general equilibrium model which describes a two‐country monetary union open to the rest of the world. A key feature of the model deals with one specific dimension of financial integration, namely cross‐border bank holdings of government bonds. We show that a negative preference shock in one country can have salient spillover effects on the rest of the union. Spillovers come not only from the financial markets opening‐up, but also from the intensity of intra‐union trade, and the response of macroeconomic (monetary and fiscal) policies.