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MZE: a small macro-model for the euro area

Author

Listed:
  • P.-O. BEFFY

    (Insee)

  • X. BONNET

    (Insee)

  • M. DARRACQ-PARIES

    (Direction de la Prévision,French Ministry of Finance)

  • B. MONFORT

    (Insee)

Abstract

This paper describes a small macro-model for the euro area. It has been built using Eurostat quarterly data and is aimed at improving the current tools used for forecasting and analysing the economy of the area. Some key data, such as capital stock or households disposable income, have been constructed beforehand by using partial data given by Eurostat. The model mingles short run Keynesian dynamics with a consistent neo-classical supply side. In the current version, potential output is given by a constant-returns-to-scale Cobb-Douglas production function. Labour supply is determined via a Phillips curve or within a wage-setting framework and the rate of participation to the labour force depends on the rate of unemployment. The short run dynamics is determined by an error-correction model, which implicitly assumes the presence of adjustment costs that smooth the convergence towards the long run equilibrium. The properties of the model are satisfying in many ways. The forecasts given by the model can be favourably compared to those given by a Vector-Autoregression, using a few exogenous values reflecting both the foreign and monetary environment; the model also allows understanding the evolution of a range of macroeconomic variables. Moreover, the models responses to standard shocks are in line with usual analytical exercises. In the long run, potential output is determined by the working age population, total factor productivity, the terms of trade, wage taxation and the real cost of capital. The model can also be used with rational-expectation-hypothesis dealing with the exchange rate and the long-term interest rate. This enables an illustrative study for the choice of monetary reaction functions.

Suggested Citation

  • P.-O. Beffy & X. Bonnet & M. Darracq-Paries & B. Monfort, 2003. "MZE: a small macro-model for the euro area," Documents de Travail de l'Insee - INSEE Working Papers g2003-11, Institut National de la Statistique et des Etudes Economiques.
  • Handle: RePEc:nse:doctra:g2003-11
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    References listed on IDEAS

    as
    1. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    2. David Rae & David Turner, 2001. "A Small Global Forecasting Model," OECD Economics Department Working Papers 286, OECD Publishing.
    3. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    4. Kashyap, Anil K. & Mojon, Benoît & Terlizzese, Daniele & Backé, Peter, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 114, European Central Bank.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    4. Dovern, Jonas & Meier, Carsten-Patrick, 2006. "Macroeconomic aspects of structural labor market reforms in Germany," Kiel Working Papers 1295, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Macroeconometric Modelling; Euro Area Dataset; Forecasting; Impulse Response; Rational Expectations; Monetary Reaction Functions;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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