PIIGS in the Euro Area. An Empirical DSGE Model

We build up and estimate a two-region DSGE model of the Euro area, investigating the interactions between the peripheral countries (PIIGS) and the rest of EMU. Our main focus is on the 2008-2009 financial crisis and on the subsequent 2010-sovereign bond crisis. One striking result is that the two crises are characterized by demand shocks in the core Euro area countries, whereas region-specific permanent technology shocks explain most of output growth slowdown in the PIIGS countries. Our results suggest that the capital flows reversals caused important supply-side effects in the Eurozone periphery