An Estimated Open-economy Model for the EURO Area

Abstract

This paper presents an open economy DSGE model, which is estimated on a euro area data set using Bayesian techniques. An attempt is made to impose stochastic assumptions which are consistent with observed trends. In particular we allow for a unit root in technology which allows us to work with actual growth rates. In addition we respect the long run equilibrium constraints implied by the model. The model is compared to a VECM in order to detect weaknesses in the specification. A full Bayesian IRF analysis is performed with a detailed sensitivity analysis of the IRF shape versus model coefficients.