The economic consequences of euro area modelling shortcuts

Libero Monteforte and Stefano Siviero

No 458, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The available empirical evidence suggests that non-negligible differences in economic structures persist among euro area countries. Because of these asymmetries, an area-wide modelling approach is arguably less reliable, from a strictly statistical viewpoint, than a multi-country one. This paper revolves around the following issue: are those (statistically detectable) asymmetries of any practical relevance when it comes to supporting monetary policy decision-making? To answer this question, we compute optimal parameter values of a Taylor-type rule, using two simple area-wide and multi-country models for the three largest economies in the euro area, and compare the corresponding optimized loss functions. The results suggest that the welfare under performance of an area-wide modelling approach is likely to be far from trifling.

Keywords: euro area; aggregation; monetary policy rules (search for similar items in EconPapers)
JEL-codes: C53 E52 (search for similar items in EconPapers)
Date: 2002-12
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Citations: View citations in EconPapers (14)

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