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MZE: a small macro-model for the euro area

Listed author(s):
  • P.-O. BEFFY





    (Direction de la Prévision,French Ministry of Finance)



This paper describes a small macro-model for the euro area. It has been built using Eurostat quarterly data and is aimed at improving the current tools used for forecasting and analysing the economy of the area. Some key data, such as capital stock or households disposable income, have been constructed beforehand by using partial data given by Eurostat. The model mingles short run Keynesian dynamics with a consistent neo-classical supply side. In the current version, potential output is given by a constant-returns-to-scale Cobb-Douglas production function. Labour supply is determined via a Phillips curve or within a wage-setting framework and the rate of participation to the labour force depends on the rate of unemployment. The short run dynamics is determined by an error-correction model, which implicitly assumes the presence of adjustment costs that smooth the convergence towards the long run equilibrium. The properties of the model are satisfying in many ways. The forecasts given by the model can be favourably compared to those given by a Vector-Autoregression, using a few exogenous values reflecting both the foreign and monetary environment; the model also allows understanding the evolution of a range of macroeconomic variables. Moreover, the models responses to standard shocks are in line with usual analytical exercises. In the long run, potential output is determined by the working age population, total factor productivity, the terms of trade, wage taxation and the real cost of capital. The model can also be used with rational-expectation-hypothesis dealing with the exchange rate and the long-term interest rate. This enables an illustrative study for the choice of monetary reaction functions.

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File Function: Document de travail de la DESE numéro G2003-11
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Paper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2003-11.

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Date of creation: 2003
Handle: RePEc:crs:wpdeee:g2003-11
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  1. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
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