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An estimated dynamic stochastic general equilibrium model of the euro area

  • Frank Smets


    (European Central Bank

  • Raf Wouters


    (National Bank of Belgium, Research Department)

This paper develops and estimates a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate).

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 35.

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Length: 71 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:nbb:reswpp:200210
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