DP7385 Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and EU Using Indirect Inference

Author(s): Vo Phuong Mai Le, David Meenagh, Patrick Minford, Michael R. Wickens
Publication Date: July 2009
Keyword(s): Bootstrap, DSGE, indirect inference, New Classical, New Keynesian, Open economy model, VAR, Wald statistic
JEL(s): C12, C32, C52, E1
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7385

We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU.