Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity

Eric Jondeau and Jean-Guillaume Sahuc

No 07-36, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper investigates the implications of cross-country heterogeneity within the euro area for the design of optimal monetary policy. We build an optimizing-based multi-country model (MCM) describing the euro area in which di¤erences between structural parameters across countries are allowed. Using Bayesian techniques, we estimate the MCM and its area-wide counterpart (AWM). We then question which model is the most appropriate for monetary policypurposes. Several results emerge. First, using an AWM induces relatively large and signifficant welfare losses. Second, this is not the use of a rule based on aggregated variables that is costly in terms of welfare, but rather the use of a sub-optimal forecasting model. Third, allowing for habit on consumption has important implications for the dynamics of models but taking into account difference in price indexation has more drastic effects on welfare losses.

Keywords: Euro area; heterogeneity; optimal monetary policy; Bayesian econometrics (search for similar items in EconPapers)
JEL-codes: C51 E52 F41 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-11
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Related works:
Journal Article: Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-Country Heterogeneity (2008)
Working Paper: Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-country Heterogeneity (2008)
Working Paper: Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-country Heterogeneity (2006)
Working Paper: Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-country Heterogeneity (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0736

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