Solving forward-looking models of cross-country adjustment within the euro area
AbstractThis paper generalizes the standard methods of solving rational expectations models to the case of time-varying nonstochastic parameters, recurring in a finite cycle. Such a specification occurs in a simple stylized New Keynesian model of the euro area when we combine the rotation in the ECB Governing Council (as constituted by the Treaty of Nice) and home bias in the interest rate decisions taken by its members. In small and mid-size economies, this combination slightly increases output and inflation volatility, as compared to a monetary policy setup without rotation. The method of Christiano (2002) has also been applied to solve the model when we assume a lagged perception of foreign macroeconomic shocks by domestic agents. When the cross-country synchronization of shocks is low or moderate and when these shocks are relatively persistent, the exclusion of contemporaneous foreign shocks from domestic agents' information sets may raise the volatility of output. There is also some tentative evidence that this effect could particularly affect mid-size economies.
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Bibliographic InfoPaper provided by Ministry of Finance in Poland in its series MF Working Papers with number 1.
Length: 31 pages
Date of creation: 04 Sep 2009
Date of revision:
EMU; monetary policy; solving rational expectations models; generalized Schur decomposition; heterogeneity;
Other versions of this item:
- Andrzej Torój, 2009. "Solving Forward-Looking Models of Cross-Country Adjustment within the Euro Area," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 1(3), pages 211-241, November.
- Andrzej Torój, 2009. "Solving forward-looking models of cross-country adjustment within the euro area," Working Papers 1, Ministry of Finance in Poland.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F15 - International Economics - - Trade - - - Economic Integration
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