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Macroeconomic modelling in EMU: how relevant is the change in regime?

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Author Info
Javier Andrés (Universidad de Valencia)
Fernando Restoy () (Banco de España)

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Abstract

We analyse the likely effects of changes in the monetary and financial regimes of EMU countries on the dynamics of output and inflation. In particular, we evaluate the impact of the regime shift on the forecasting performance of reduced-form models. Data for both the pre-EMU and the EMU regimes are generated by a relatively standard open-economy-DSGE model with sticky prices and wages and restricted access to financial markets for some individuals. We find that the effects of the shift in the monetary regime on the processes followed by macroeconomic variables depend on the nature of the shocks hitting the economy. For plausible shocks distributions the reduction in the accuracy of VAR-based inflation forecasts is relatively large and significant. The effect of the regime shift on output forecasts seem rather more modest and statistically insignificant. The impact on ouput forecasting accuracy would be comparatively much larger if the new monetary union regime is accompanied by a moderate relaxation of constraints affecting financial market access.

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Paper provided by Banco de España in its series Banco de España Working Papers with number 0718.

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Length: 33 pages
Date of creation: Jun 2007
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Handle: RePEc:bde:wpaper:0718

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Related research
Keywords: forecasting; general equilibrium models; monetary union; inflation and output dynamics;

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Find related papers by JEL classification:
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

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