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Disinflation Shocks in the Eurozone: A DSGE Perspective


  • We would like to thank Poksang Lam (editor) and an anonymous referee for useful remarks and suggestions. This paper has also benefited from helpful comments in various conferences and seminars. We also appreciate discussions with G. Ascari, O. Blanchard, F. Collard, M. Dupaigne, H. Le Bihan, C. Pfister, F. Portier, U. Soderstrom, J.P. Villetelle, and T. Yates. The traditional disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect those of the Banque de France.


We investigate the effects of disinflation policies on key macroeconomic variables. Using euro area data and structural vector autoregressions (SVARs), we identify disinflation shocks as the only shocks that drive nominal variables to a lower long-run level. We find that in the immediate aftermath of a disinflation shock, the euro area enters in a persistent recession. We use these dynamic responses to estimate a DSGE model with imperfect information about the disinflation shock. We find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks. Conversely, allowing for imperfect credibility does not yield a better fit, except when we shut key model's frictions down.