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Aggregation bias in macro models: does it matter foir the euro area?

  • Libero Monteforte

    ()

    (Bank of Italy, Economic Research Department)

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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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 534.

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Date of creation: Dec 2004
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Handle: RePEc:bdi:wptemi:td_534_04
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