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A small estimated Euro area model with rational expectations and nominal rigidities

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Author Info
Günter Coenen () (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
Volker Wieland () (University of Frankfurt, Professor, Monetary Theory and Policy, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)

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Abstract

In this paper we estimate a small model of the euro area to be used as a laboratory for evaluating the performanceof alternative monetary policy strategies. We focus on the relationship between output and inflation and investigate the fit of the nominal wage contracting model due to Taylor (1980) and three different versions of the relative real wage contracting model proposed by Buiter and Jewitt (1981) and estimated by Fuhrer and Moore (1995a) for the United States. While Fuhrer and Moore reject the nominal contracting model in favor of the relative contracting model which induces more inflation persistence, we find that both models fit euro area data reasonably well. When considering France, Germany and Italy separately, however, we find that the nominal contracting model fits German data better, while the relative contracting model does quite well in countries which transitioned out of a high inflation regime such as France and Italy. JEL Classification: E31; E52; E58; E61.

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Paper provided by European Central Bank in its series Working Paper Series with number 30.

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Length: 68 pages
Date of creation: Sep 2000
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Handle: RePEc:ecb:ecbwps:20000030

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Keywords: European monetary union; euro area; macroeconomic modelling; rational expectations; nominal rigidities; overlapping wage contracts; inflation persistence; monetary policy rules.;

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