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The economic consequences of euro area modelling shortcuts

  • Libero Monteforte

    ()

    (Bank of Italy, Economic Research Department)

  • Stefano Siviero

    ()

    (Bank of Italy, Economic Research Department)

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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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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  27. repec:adr:anecst:y:2002:i:67-68:p:08 is not listed on IDEAS
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