The Coenen-Wieland (2000) Model
The Coenen-Wieland (CW) Model is a small-scale model of aggregate supply and aggregate demand which is designed to capture the broad characteristics of inflation and output dynamics in the euro area. Since its development, the model has been mainly used as a laboratory for evaluating the performance of alternative monetary policy strategies in the vein of recent studies for the United States.
The supply side of the model incorporates price and wage staggering, with wage setters negotiating long-term nominal wage contracts with reference to both past contracts that are still in effect and to future contracts that will be negotiated over the life of the current contracts. If wage setters expect the output gap, that is the deviation of actual output from potential, to be positive they adjust the current wage contracts upward. As a result, inflation depends on own leads and lags, excess-demand conditions as well as transitory contract wage shocks, the latter resembling cost-push shocks.
There are two versions of the supply side which feature distinct types of staggered wage contracts: the nominal wage contracting specification due to Taylor (1980) and the relative real wage contracting specification by Fuhrer and Moore (1995). The two specifications differ with respect to the degree of inflation persistence that they induce, with Fuhrer-Moore-type contracts giving more weight to past inflation developments.
A simple aggregate demand relationship relates the output gap to several lags of itself, the ex ante long-term real interest rate and a transitory demand shock. The long-term real rate is determined jointly by a term-structure relationship and the Fisher equation. As a benchmark for conducting monetary policy experiments, short-term nominal interest rates are set according to a Taylor-type interest rate rule that relates the short-term nominal interest rate to developments in inflation and the output gap. Changes in the short-term nominal interest rate affect aggregate demand through their impact on the ex ante long-term real interest rate.