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Aggregation bias in macro models: Does it matter for the euro area?

  • Monteforte, Libero

The euro area represents a case-study of great institutional relevance for the econometric problem of aggregation bias. The available data can be used to analyze the area either with aggregate or with country-specific models. The choice should be the result of a statistical comparison between the two options, with respect to the specific model. In this paper we suggest a representation of the aggregation error based on unobservable components and explicitly conceived for aggregations over a small number of economies. In the empirical application two alternative models are estimated: the first specifies the main euro countries while the other refers to the whole area. We then evaluate the aggregation error either from the viewpoint of a comparison of the two models with standard methods, or looking at the components of the representation suggested here. Both categories of results indicate non-negligible aggregation errors for the euro area.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 24 (2007)
Issue (Month): 2 (March)
Pages: 236-261

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Handle: RePEc:eee:ecmode:v:24:y:2007:i:2:p:236-261
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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