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The economic consequences of euro area modelling shortcuts

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  • Libero Monteforte

    ()
    (Bank of Italy, Economic Research Department)

  • Stefano Siviero

    ()
    (Bank of Italy, Economic Research Department)

Abstract

The available empirical evidence suggests that non-negligible differences in economic structures persist among euro area countries. Because of these asymmetries, an area-wide modelling approach is arguably less reliable, from a strictly statistical viewpoint, than a multi-country one. This paper revolves around the following issue: are those (statistically detectable) asymmetries of any practical relevance when it comes to supporting monetary policy decision-making? To answer this question, we compute optimal parameter values of a Taylor-type rule, using two simple area-wide and multi-country models for the three largest economies in the euro area, and compare the corresponding optimized loss functions. The results suggest that the welfare under performance of an area-wide modelling approach is likely to be far from trifling.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 458.

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Date of creation: Dec 2002
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Handle: RePEc:bdi:wptemi:td_458_02

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Keywords: euro area; aggregation; monetary policy rules;

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References

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Citations

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Cited by:
  1. De Grauwe, Paul & Senegas, Marc-Alexandre, 2006. "Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?," European Journal of Political Economy, Elsevier, vol. 22(4), pages 787-808, December.
  2. Sophocles N. Brissimis & Ifigeneia Skotida, 2007. "Optimal Monetary Policy in the Euro Area in the Presence of Heterogeneity," Working Papers 62, Bank of Greece.
  3. Ramón Adalid & Günter Coenen & Peter McAdam & Stefano Siviero, 2005. "The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  4. Paolo Angelini & Paolo Del Giovane & Stefano Siviero & Daniele Terlizzese, 2008. "Monetary Policy in a Monetary Union: What Role for Regional Information?," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 1-28, September.
  5. Monteforte, Libero, 2007. "Aggregation bias in macro models: Does it matter for the euro area?," Economic Modelling, Elsevier, vol. 24(2), pages 236-261, March.
  6. Roberto Golinelli & Giuseppe Parigi, 2003. "What is this thing called confidence? A comparative analysis of consumer confidence indices in eight major countries," Temi di discussione (Economic working papers) 484, Bank of Italy, Economic Research and International Relations Area.

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