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

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  • Libero Monteforte

    (Bank of Italy, Economic Research Department)

Abstract

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.

Suggested Citation

  • Libero Monteforte, 2004. "Aggregation bias in macro models: does it matter foir the euro area?," Temi di discussione (Economic working papers) 534, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_534_04
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    More about this item

    Keywords

    aggregation bias; euro-area modeling;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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