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.