Working Paper: CEPR ID: DP16313
Authors: Patrick Minford; Michael R. Wickens; Zhirong Ou; Zheyi Zhu
Abstract: We construct a macro DSGE model of the eurozone and its two main regions, the North and theSouth, with the aim of matching the macro facts of these economies by indirect inference and using theresulting empirically-based model to assess possible new policy regimes. The model we have found to fitthe facts suggests that substantial gains in macro stability and consumer welfare are possible if the fiscalauthority in each region is given the freedom to respond to its own economic situation. Further gainscould come with the restoration of monetary independence to the two regions, in effect creating a second'southern euro' bloc.
Keywords: eurozone; macro stability; fiscal policy; monetary independence
JEL Codes: E32; E52; E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal authority autonomy (O23) | Macro stability (E60) |
| Fiscal authority autonomy (O23) | Consumer welfare (D69) |
| Restoring monetary independence (E49) | Macro stability (E60) |
| Restoring monetary independence (E49) | Consumer welfare (D69) |
| Lack of flexibility in fiscal policies (E62) | Economic instability (E32) |
| Independent fiscal and monetary policies (E63) | Improved macroeconomic outcomes (E65) |
| Two-eurozone structure (F36) | Enhanced economic performance (O49) |