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The economic consequences of Euro-area macro-modelling shortcuts
[journal article]
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
stru... view more
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 heterogeneities of any practical
relevance when it comes to supporting monetary policy decision-making?
To provide an answer to this question, we compute simple 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 area-wide-model-based
rule is not only non negligible, but also robust with respect to a number
of sensitivity analyses.... view less
Keywords
aggregation; monetary policy
Classification
Economic Statistics, Econometrics, Business Informatics
European Politics
Economic Policy
Free Keywords
Euro area; monetary policy rules; robustness; Regelgebundene Politik; Modell-Spezifikation; Mehr-Länder-Modell; Europäische Wirtschafts- und Währungsunion; EU-Staaten
Document language
English
Publication Year
2008
Page/Pages
p. 2399-2415
Journal
Applied Economics, 42 (2008) 19
DOI
https://doi.org/10.1080/00036840701858075
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)