Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Scientific Monographs, Bank of Finland

No E:23/2002:
EDGE: a model of the euro area with applications to monetary policy

Mika Kortelainen ()

Abstract: We ask the question: Does it matter whether expections on monetary policy are heterogeneous across agents in the economy? We tackle this issue with the aid of a dynamic general equilibrium model with nominal rigidities. The most important features of the model include consumption/saving decisions according to Blanchard's stochastic lifetimes approach; valuation of private financial wealth according to the present value of capital income; overlapping Calvo wage contracts in the labour market; and a neoclassical supply side with Cobb-Douglas technology. The model is calibrated to match the first and second moments of the publicly available euro area data. In simulation checks we find that the autocorrelation structure of the model, when subjected to stochastic shocks, also resembles that of the euro area data. Furthermore, diagnostic simulation results of the model provide intuitively appealing economic responses. In studying the effect of heterogeneity of expectations, we distinguish between central bank expectations and private sector expectations. The results show that if private sector expectations differ from central bank expectations, there will be real costs to the economy. We also show that the existence of a learning mechanism in the economy results in significantly smaller costs to the economy. And we find that random shifts interpreted as lack of transparency cause changes in private sector expectations, which generate costs in the form of higher variability in the economy. All in all, our results show that heterogeneity of expectations on monetary policy may generate economically significant costs.

Keywords: EDGE; rational expectations; heterogeneous expectations; learning; dynamic general equilibrium model; (follow links to similar papers)

JEL-Codes: E52; (follow links to similar papers)

169 pages, August 29, 2002

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

E23.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Päivi Määttä () or Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofism:2002_023 This page was generated on 2014-12-14 19:21:12