A Small Forward-Looking Macroeconomic Model for Emu

BBVA Research Department Working Paper No. 0201

20 Pages Posted: 1 Nov 2001

See all articles by Rafael Doménech

Rafael Doménech

University of Valencia - Department of Economic Analysis

Mayte Ledo

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department

David Taguas

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department

Date Written: July 2001

Abstract

In this paper we estimate a small forward-looking macroeconomic model for EMU which allows us to analyze the transmission mechanism of the monetary policy implemented by the European Central Bank through an interest rate rule that stabilizes inflation and output. The estimation of this model, which comprises forward-looking versions of the IS and the Phillips curves as well as the interest rate rule, is conducted by GMM using quarterly data from 1986 to 2000. We find that this simple model matches the dynamic properties of the output gap, inflation and the interest rate in EMU quite accurately. We also perform several exercises that show the response of output, inflation and interest rates to different kinds of shocks affecting the economy, under the assumption that the ECB implements the monetary policy described by the estimated interest rate rule. Comparisons with backward-looking models for the United States show that our forward-looking model produces less persistence of the endogenous variables in response to shocks of the same magnitude.

Keywords: IS curve, inflation, interest rate rule, monetary policy

JEL Classification: E31, E32, E52

Suggested Citation

Doménech, Rafael and Ledo, Mayte and Taguas, David, A Small Forward-Looking Macroeconomic Model for Emu (July 2001). BBVA Research Department Working Paper No. 0201, Available at SSRN: https://ssrn.com/abstract=289059 or http://dx.doi.org/10.2139/ssrn.289059

Rafael Doménech (Contact Author)

University of Valencia - Department of Economic Analysis ( email )

Campus de los Naranjos
46022 Valencia
Spain
+96 382 8210 (Phone)
+96 382 8249 (Fax)

Mayte Ledo

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department ( email )

Paseo de Recoletos, 10
Madrid
Spain

David Taguas

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) - Research Department ( email )

Paseo de Recoletos, 10
Madrid
Spain

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