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

Eric Jondeau and Jean-Guillaume Sahuc

No 04-13, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: We investigate 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 differences between structural parameters across countries are allowed. Using Bayesian techniques, we estimate the MCM and its area-wide counterpart (AWM) and compare their empirical performances. We then question which model is the most appropriate for monetary policy purposes. We find that using an AWM induces relatively large and significant welfare losses. Our results also suggest that 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.

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: 51 pages
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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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 (2007)
Working Paper: Optimal Monetary Policy in an Estimated DSGE Model of the Euro Area with Cross-country Heterogeneity (2006)
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