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The economic consequences of Euro-area macro-modelling shortcuts

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Monteforte, Libero; Siviero, Stefano

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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 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.
Keywords aggregation; monetary policy; aggregation
Classification European Politics; Economic Policy; Economic Statistics, Econometrics, Business Informatics
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
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)