An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area

70 Pages Posted: 14 May 2003

See all articles by Frank Smets

Frank Smets

European Central Bank (ECB); Ghent University - Department of General Economics

Rafael Wouters

National Bank of Belgium

Date Written: August 2002

Abstract

This paper develops and estimates a stochastic dynamic general equilibrium (SDGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allow for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate).

Keywords: SDGE models, monetary policy, euro area

JEL Classification: E4, E5

Suggested Citation

Smets, Frank and Wouters, Rafael, An Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area (August 2002). Available at SSRN: https://ssrn.com/abstract=358102 or http://dx.doi.org/10.2139/ssrn.358102

Frank Smets (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ghent University - Department of General Economics ( email )

Hoveniersberg 24
Ghent, 9000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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