A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities

Günter Coenen and Volker Wieland

No 3574, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this Paper we estimate a small model of the Euro area to be used as a laboratory for evaluating the performance of alternative monetary policy strategies. We start with the relationship between output and inflation and investigate the fit of the nominal wage contracting model due to Taylor (1980) and three different versions of the relative real wage contracting model proposed by Buiter and Jewitt (1981) and estimated by Fuhrer and Moore (1995a) for the United States. While Fuhrer and Moore reject the nominal contracting model in favor of the relative contracting model which induces more inflation persistence, we find that both models fit Euro area data reasonably well. When considering France, Germany and Italy separately, however, we find that the nominal contracting model fits German data better, while the relative contracting model does quite well in countries which transitioned out of a high inflation regime such as France and Italy. We close the model by estimating an aggregate demand relationship and investigate the consequences of the different wage contracting specifications for the inflation-output variability tradeoff, when interest rates are set according to Taylor?s rule.

Keywords: European monetary union; Euro area; Nominal rigidities; Inflation persistence; Staggered contracts; Macroeconomic models (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: A small estimated euro area model with rational expectations and nominal rigidities (2005)
Working Paper: A Small Estimated Euro Area Model with Rational Expectations and Nominal Rigidities (2003)
Working Paper: A small estimated euro area model with rational expectations and nominal rigidities (2000)
Working Paper: A Small Estimated Euro-Area Model with Rational Expectations and Nominal Rigidities (2000)
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