Macroeconomic modelling in EMU: how relevant is the change in regime?

Javier Andrés () and Fernando Restoy ()
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Fernando Restoy: Banco de España

No 718, Banco de España Working Papers from Banco de España

Abstract: We analyse the likely effects of changes in the monetary and financial regimes of EMU countries on the dynamics of output and inflation. In particular, we evaluate the impact of the regime shift on the forecasting performance of reduced-form models. Data for both the pre-EMU and the EMU regimes are generated by a relatively standard open-economy-DSGE model with sticky prices and wages and restricted access to financial markets for some individuals. We find that the effects of the shift in the monetary regime on the processes followed by macroeconomic variables depend on the nature of the shocks hitting the economy. For plausible shocks distributions the reduction in the accuracy of VAR-based inflation forecasts is relatively large and significant. The effect of the regime shift on output forecasts seem rather more modest and statistically insignificant. The impact on ouput forecasting accuracy would be comparatively much larger if the new monetary union regime is accompanied by a moderate relaxation of constraints affecting financial market access.

Keywords: forecasting; general equilibrium models; monetary union; inflation and output dynamics (search for similar items in EconPapers)
JEL-codes: E17 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-for and nep-mac
Date: Written
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Persistent link: http://EconPapers.repec.org/RePEc:bde:wpaper:0718

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