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.