Launching the NEUQ: The New European Union Quarterly Model, A Small Model of the Euro Area and U.K. Economies

Anna Piretti and Charles St-Arnaud

Staff Working Papers from Bank of Canada

Abstract: The authors develop a projection model of the euro area and the United Kingdom. The model consists of two country blocks, endogenous to each other via the foreign demand channel. Each country block features an aggregate IS curve, a forward-looking Phillips curve, and an estimated forward-looking monetary policy reaction function. Potential output is estimated by means of a Hodrick-Prescott filter, conditioned by an equilibrium path generated by a structural vector autoregression (Rennison 2003 and Gosselin and Lalonde 2002). The Phillips curve is specified in terms of the output gap, and inflation dynamics are described by the polynomial adjustment cost (PAC) approach, as in Kozicki and Tinsley (2002). The model delivers relatively accurate projections at a variety of forecast horizons and provides a useful tool for policy analysis. The authors' simulation results suggest that output and inflation exhibit a greater degree of persistence to shocks in the euro area than in the United Kingdom.

Keywords: Economic models; Business fluctuations and cycles (search for similar items in EconPapers)
JEL-codes: C53 E17 E37 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:06-22

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