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An estimated open-economy model for the EURO area

Author

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  • Marco Ratto
  • Werner Roeger

Abstract

We estimate a small open economy DSGE model for the euro area. The household sector optimises an intertemporal utility function with habit persistence. Households decide about asset accumulation, consumption and sets wages in a monopolistically competitive labour market. Households trade bonds internationally and there is a risk premium determined by the degree of foreign indebtedness. Firms are owned by domestic households. Consistent with the household objective function they determine labour demand, capacity, investment and they set prices in a monopolistically competitive goods market by maximising the market value of the corporate sector. Apart from technological constraints, decisions are subject to convex adjustment costs. Monetary policy is modelled via a Taylor rule. A Bayesian estimation approach is applied, using the Dynare code, by Michel Juillard, via the log-linearisation of the model around the steady state, solution of the forward looking log-linear model and computation of the likelihood via Kalman filter. After estimating the posterior mode via standard optimisation routines, the posterior distribution of model parameters is estimated with a Metropolis Markov Chain Monte Carlo approach. Unobserved components are also derived, such as technology, target inflation, capital utilisation. A full Bayesian impulse response analysis is then performed, comprising a detailed sensitivity analysis of the main dynamical features of the model simulations versus changes in model parameters.

Suggested Citation

  • Marco Ratto & Werner Roeger, 2005. "An estimated open-economy model for the EURO area," Computing in Economics and Finance 2005 84, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:84
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    References listed on IDEAS

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    1. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    2. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
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    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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    6. repec:hrv:faseco:3353756 is not listed on IDEAS
    7. Paul De Grauwe & Cláudia Costa Storti, 2004. "The Effects of Monetary Policy: A Meta-Analysis," CESifo Working Paper Series 1224, CESifo Group Munich.
    8. Shi, Shouyong & Wen, Quan, 1999. "Labor market search and the dynamic effects of taxes and subsidies," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 457-495, April.
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    Citations

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    Cited by:

    1. Evren Caglar & Jagjit S. Chadha & Katsuyuki Shibayama, 2011. "Bayesian Estimation of DSGE models: Is the Workhorse Model Identified?," Studies in Economics 1125, School of Economics, University of Kent.
    2. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2010. "New Keynesian versus old Keynesian government spending multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 281-295, March.
    3. Röger, Werner & Székely, Istvan P. & Turrini, Alessandro Antonio, 2010. "Banking crises, Output Loss and Fiscal Policy," CEPR Discussion Papers 7815, C.E.P.R. Discussion Papers.
    4. Dybczak, Kamil & Melecky, Martin, 2014. "EU fiscal stance vulnerability: Are the old members the gold members?," Economic Modelling, Elsevier, vol. 38(C), pages 87-101.
    5. PLASMANS, Joseph & FORNERO, Jorge & MICHALAK, Tomasz, 2006. "A microfounded sectoral model for open economies," Working Papers 2007013, University of Antwerp, Faculty of Applied Economics.
    6. Julia Lendvai & Werner Roeger, 2010. "External deficits in the Baltics 1995 to 2007: Catching up or imbalances," European Economy - Economic Papers 2008 - 2015 398, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Fritz Breuss & Katrin Rabitsch, 2009. "An estimated two-country DSGE model of Austria and the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(1), pages 123-158, February.
    8. Hjelm, Göran & Jönsson, Kristian, 2010. "In Search of a Method for Measuring the Output Gap of the Swedish Economy," Working Papers 115, National Institute of Economic Research.
    9. Dybczak, Kamil & Melecky, Martin, 2011. "Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis," MPRA Paper 33684, University Library of Munich, Germany.
    10. Marianna Riggi & Massimiliano Tancioni, 2008. "Nominal v. Real Wage Rigidities in New Keynesian Models with Hiring Costs," Working Papers 107, University of Rome La Sapienza, Department of Public Economics.
    11. Alfonso Arpaia & Werner Roeger & Janos Varga & Jan in 't Veld & Alexandr Hobza & Isabel Grilo & Peter Wobst, 2007. "Quantitative assessment of Structural Reforms: Modelling the Lisbon Strategy," European Economy - Economic Papers 2008 - 2015 282, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    12. Alessandro Turrini, 2008. "Fiscal policy and the cycle in the Euro Area: The role of government revenue and expenditure," European Economy - Economic Papers 2008 - 2015 323, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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