The economic consequences of euro-area macro-modelling shortcuts

Libero Monteforte, Stefano Siviero
2010 Applied Economics  
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more » ... chen Schutz beibehalten werden. Sie dürfen dieses Dokument nicht in irgendeiner Weise abändern, noch dürfen Sie dieses Dokument für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, aufführen, vertreiben oder anderweitig nutzen. Mit der Verwendung dieses Dokuments erkennen Sie die Nutzungsbedingungen an. Abstract Should euro-area economies be modelled in an aggregate (area-wide) fashion or in a disaggregate (multi-country) one? This paper tackles that question from both a statistical and an economic viewpoint. From a statistical viewpoint, aggregation bias criteria are found to signal that the degree of structural heterogeneity among euro-area economies is such that the loss of information entailed by an aggregate modelling approach may be far from trifling. From an economic viewpoint, we investigate the following issue: Are those statistically detectable asymmetries of any practical relevance when it comes to supporting monetary policy decisionmaking? To provide an answer to this question, we compute optimal monetary policy reaction functions on the basis of either an aggregate model or a disaggregate one, and compare the associated welfare losses. The results suggest that the welfare under-performance of an areawide-model-based rule is not only non negligible, but also systematic, significant and robust with respect to a number of sensitivity analyses. and participants in workshops at the Banque de France and University of Rome "La Sapienza" for many helpful comments and suggestions on previous versions of this work. The usual disclaimers apply. The views expressed in this paper are those of the authors and do necessarily represent those of the Bank of Italy. 2 A (very) partial list of recent works that have a bearing on this issue includes Dornbusch, Favero and Both approaches are being pursued in practice, even by the same institutions. For instance, the European Central Bank (ECB) maintains an aggregate model (see ) and is in the process of building a disaggregate one. Also, the euro-area projections by the Eurosystem (the institution comprising the ECB and the national central banks of euro-area countries) are the result of a multi-staged process that involves aggregating country-specific projections while also using information derived from the ECB's area-wide model, to come to one single, consistent picture (see ECB (2001) ). 7 In keeping with the approach followed in similar literature, neither the AEAM nor the DEAM that we use for our experiments below include any constant terms, i.e., it may be taken to provide a description of the functioning of the euro area economy in the neighborhood of equilibrium. This amounts to implicitly assuming that the same equilibrium values apply to all countries, a condition that does not necessarily hold in the sample period, particularly regarding the (implied) equilibrium real interest rates.
doi:10.1080/00036840701858075 fatcat:icpxguot7ndkhlma7335m5fgei