The euro area's pandemic recession: A DSGE-based interpretation.

This paper augments the European Commission's open-economy DSGE model (GM) with COVID-specific shocks ('forced savings', labour hoarding) and financially-constrained investors to account for the extreme volatility of private domestic demand and hours worked during COVID-19, and it estimates the model on euro area data for the period 1998q4-2021q4. It takes a pragmatic approach of adapting the workhorse model of a policy institution to COVID-19 data. 'Forced savings' are central to explain quarterly real GDP growth during the pandemic, complemented by contributions from foreign demand and trade, and the negative impact of persistently higher savings after the first wave. We provide extensive model validation, including a comparison to off-model evidence for COVID-related restrictions, and a comparison of different model specifications.