Working Paper: CEPR ID: DP7385
Authors: Vo Phuong Mai Le; David Meenagh; Patrick Minford; Michael R. Wickens
Abstract: 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.
Keywords: Bootstrap; DSGE; Indirect inference; New classical; New Keynesian; Open economy model; VAR; Wald statistic
JEL Codes: C12; C32; C52; E1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic shocks (E32) | Macroeconomic behaviors (E70) |
| US and EU economies (O52) | Lack of spillovers (D62) |
| Output and real exchange rate (F31) | Model fit (C52) |
| Directed Wald test (C29) | Evaluation of model fit (C52) |
| Model rejection (C52) | Misspecification in capturing nominal relationships (C51) |