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The ECB's New Multi-Country Model for the euro area: NMCM - simulated with rational expectations

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  • Dieppe, Alistair
  • González Pandiella, Alberto
  • Willman, Alpo

Abstract

The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elastiticites of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions. We assume agents optimise under limited information where each agent knows only the parameters related to his/her optimization problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depends strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible. JEL Classification: C51, C6, E5

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1315.

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Date of creation: Apr 2011
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Handle: RePEc:ecb:ecbwps:20111315

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Keywords: Macro model; open-economy macroeconomics; Rational Expectations;

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Citations

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Cited by:
  1. Angelini, Elena & Ca' Zorzi, Michele & Forster, Katrin, 2014. "External and macroeconomic adjustment in the larger euro area countries," Working Paper Series 1647, European Central Bank.
  2. Giovanni Bernardo & Emanuele Campiglio, 2013. "A Simple Model of Income, Aggregate Demand, and the Process of Credit Creation by Private Banks," Economics Working Paper Archive wp_777, Levy Economics Institute.
  3. Angelini, Elena & Dieppe, Alistair & Pierluigi, Beatrice, 2013. "Learning about wage and price mark-ups in euro area countries," Working Paper Series 1512, European Central Bank.

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