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Gabriel Fagan

1 January 2001
WORKING PAPER SERIES - No. 42
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Abstract
This paper presents a quarterly estimated structural macroeconomic model for the euro area, denoted area-wide model (AWM). This model has been developed with four uses in mind: the assessment of economic conditions in the area, macroeconomic forecasting, policy analysis and deepening understanding of the functioning of euro area economy. Five key features of the model are highlighted. First, it treats the euro area as a single economy. Second, it is a medium sized model which, while detailed enough for most purposes, is nonetheless sufficiently small to be manageable in the context of forecasting and simulation exercises. Third, the model is designed to have a long run equilibrium consistent with classical economic theory, while its short run dynamics are demand driven. Fourth, the current version of the AWM is mostly backward-looking, i.e. expectations are reflected via the inclusion of lagged variables. Finally, the AWM uses quarterly data, allowing for a richer treatment of the dynamics, and is mostly estimated on the basis of historical data (rather than calibrated). The paper comprises the following elements. First, a general overview of the structure of the model and of its long-run and short-run properties is provided, with particular emphasis on how the model reaches its steady state. This is followed by a review of the key behavioural equations, showing e.g. the extent to which the standard behavioural equations are capable of fitting the historical euro area data which has been constructed. Finally results from two illustrative simulations are provided, i.e. a fiscal expenditure shock and a change in interest rates. Appended to the main text are the full list of econometric results, the detailed description of the database and the results of stochastic long run simulations. In addition, a companion file comprising all of the quarterly time series underlying the AWM is made available
JEL Code
C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables
C5 : Mathematical and Quantitative Methods→Econometric Modeling
E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
Annexes
25 June 2009
ANNEX
16 January 2007
WORKING PAPER SERIES - No. 716
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Abstract
In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects.
JEL Code
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
13 October 2008
WORKING PAPER SERIES - No. 946
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Abstract
The move to monetary union in Europe led to convergence of interest rates among the participating countries. This was associated with notable cross-country differences in the behaviour of key macroeconomic aggregates. Compared to the low interest rate countries, former high interest rate countries experienced a boom in domestic demand, a deterioration of the current account and appreciation of the real exchange rate. This paper documents the key stylised facts of this experience and provides a compact two-country model, based on the Blanchard-Yaari setup, to analyze this phenomenon. This model, though simple, is able to broadly capture the main qualitative features of the adjustment. Using this model, we show that the creation of the monetary union leads to an increase in welfare for all generations in both country groups.
JEL Code
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
28 April 2009
WORKING PAPER SERIES - No. 1048
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Abstract
This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries (the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
J4 : Labor and Demographic Economics→Particular Labor Markets
Network
Wage dynamics network
10 June 2010
WORKING PAPER SERIES - No. 1207
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Abstract
We develop a time-varying transition probabilities Markov Switching model in which inflation is characterised by two regimes (high and low inflation). Using Bayesian techniques, we apply the model to the euro area, Germany, the US, the UK and Canada for data from the 1960s up to the present. Our estimates suggest that a smoothed measure of broad money growth, corrected for real-time estimates of trend velocity and potential output growth, has important leading indicator properties for switches between inflation regimes. Thus money growth provides an important early warning indicator for risks to price stability.
JEL Code
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation