<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper investigates the impact of country size on the DSEG model estimation of the monetary union. Following DSGE model for fiscal policy simulations (FiMod) the union is considered to have a two-country structure, the investigated country has weight in union equal to its population share and the second country represents the rest of members. The model is estimated for different country sizes and it is found there are two areas of equilibrium instability which covers 11 of 19 European Monetary Union members. The result is in contrary with <xref ref-type="bibr" rid="j_danb-2019-0019_ref_017_w2aab3b7b3b1b6b1ab1b6c17Aa">Stähler and Thomas (2012)</xref> who estimated FiMod for Spain and stated that model can be recalibrated to every member of the monetary union. According to the result the size of country matters and affects the stability of equilibrium. Therefore, special attention is paid to small economies in monetary union. The results and consequences are then discussed with examples from recent history.</p></abstract>

This paper investigates the impact of country size on the DSEG model estimation of the monetary union. Following DSGE model for fiscal policy simulations (FiMod) the union is considered to have a two-country structure, the investigated country has weight in union equal to its population share and the second country represents the rest of members. The model is estimated for different country sizes and it is found there are two areas of equilibrium instability which covers 11 of 19 European Monetary Union members. The result is in contrary with Stähler and Thomas (2012) who estimated FiMod for Spain and stated that model can be recalibrated to every member of the monetary union. According to the result the size of country matters and affects the stability of equilibrium. Therefore, special attention is paid to small economies in monetary union. The results and consequences are then discussed with examples from recent history.

Pitfalls of DSGE Model Approach in Monetary Union

DANUBE

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Pitfalls of DSGE Model Approach in Monetary Union"}

This paper investigates the impact of country size on the DSEG model estimation of the monetary union. Following DSGE model for fiscal policy simulations...

Target	Symbol	Home country
Households

Share or Ricardian households	1 – μ	0.6
Discount factor	β	0.99
Risk aversion	σ_c	2
Habits in consumption	h	0.85
Home bias	ψ; ψ*	0.56; 0.03

Production

Depreciation rate	δ	0.025
Private capital share	α	0.4
Public capital share	η	0.015
Adjustment cost parameter	κ_I	2.48

Labor market

Separation rate (private; public sector)	s^p; s^g	0.06; 0.03
Matching elasticity (private; public sector)	φ^p; φ^g	0.5; 0.3
Bargaining power	ζ	0.5

Price and wage stickiness

Calvo parameter (prices)	θ_p	0.75
Calvo parameter (existing wages)	θ_w	0.8
Calvo parameter (new wages)	$θ_{w}^{n}$ \theta _w^n	0.7
Market power (mark-up)	ɛ	6

Fiscal policy

Smoothing parameters	ρ_j	0 – 0.1
Persistence parameters	ρ_j	0 – 0.85
Stances	Φ_j	0 – 0.1

Monetary policy

Interest rate smoothing	ρ_R	0.9
Stance on inflation	Φ_π	1.5
Stance on output gap	Φ_y	0.5

Trade in international bonds

Risk premium parameter	$ψ_{2} = ψ_{2}^{}$ \psi _2 = \psi _2^	0.01

Country	2018	Country	2018

Germany	0,2427	Slovakia	0,0160
France	0,1962	Ireland	0,0142
Italy	0,1773	Lithuania	0,0082
Spain	0,1368	Slovenia	0,0061
Netherlands	0,0504	Latvia	0,0057
Belgium	0,0334	Estonia	0,0039
Greece	0,0315	Cyprus	0,0025
Portugal	0,0302	Luxembourg	0,0018
Austria	0,0259	Malta	0,0014
Finland	0,0162

Pitfalls of DSGE Model Approach in Monetary Union

Online veröffentlicht: 31. Dez. 2019

Seitenbereich: 369 - 382

DOI: https://doi.org/10.2478/danb-2019-0019

Schlüsselwörter
DSGE, Fiscal Policy, Small Economy, Union

© 2019 Zlatica Konôpková, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Figure 1

Baseline parameter calibration

Eurozone members and their values of parameter ω.

Pitfalls of DSGE Model Approach in Monetary Union

Online veröffentlicht: 31. Dez. 2019

Seitenbereich: 369 - 382

DOI: https://doi.org/10.2478/danb-2019-0019

SchlüsselwörterDSGE, Fiscal Policy, Small Economy, Union

© 2019 Zlatica Konôpková, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Figure 1

Baseline parameter calibration

Eurozone members and their values of parameter ω.

Schlüsselwörter
DSGE, Fiscal Policy, Small Economy, Union