Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and the EU Using Indirect Inference

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Publication details

JournalOpen Economies Review
DatePublished - Feb 2010
Issue number1
Number of pages22
Pages (from-to)23-44
Original languageEnglish


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.

Bibliographical note

M1 - 1

    Research areas

  • Bootstrap, Open economy model, DSGE, VAR, New Keynesian, New Classical, Indirect inference, Wald statistic, RATIONAL-EXPECTATIONS, MONETARY-POLICY, RATES

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