 Solving Forward-Looking Models of Cross-Country Adjustment within the Euro AreaCentral European Journal of Economic Modelling and Econometrics, 2009, vol. 1, issue 3, 211-241 Abstract: This article introduces and applies two refinements to the algorithm of solving rational expectations models of a currency union. Firstly, building upon Klein (2000), it generalizes the standard methods of solving rational expectations models to the case of time-varying nonstochastic parameters, recurring in a finite cycle. Such a specification occurs in a simple stylized New Keynesian model of the euro area after a joint introduction of (i) rotation in the ECB Governing Council (as constituted by the Treaty of Nice) and (ii) home bias in the interest rate decisions preferred by its members. Secondly, we apply the method of Christiano (2002) to solve the model with heterogenous information sets. This is justified if we argue that the information set of domestic economic agents in a currency union is home-biased (i.e. foreign shocks enter only with a lag). Both methods of solution are illustrated with simulation results. Keywords: solving rational expectations models; generalized Schur decomposition; heterogenous information sets; method of Christiano; divergences in EMU (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:psc:journl:v:1:y:2009:i:3:p:211-241 Access Statistics for this article More articles in Central European Journal of Economic Modelling and Econometrics from Central European Journal of Economic Modelling and Econometrics |
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