A macroeconometric model for the Euro economy

In this paper a structural macroeconometric model for the Euro area is presented. In contrast to the multi-country modelling approach, the model relies on aggregate data on the supra-national level. Due to non-stationarity, all equations are estimated in error correction form. The cointegrating relations are derived jointly with the short-run dynamics, avoiding the finite sample bias of the two-step Engle Granger procedure. The validity of the aggregated approach is confirmed by out-of-sample forecasts and several simulation exercises. Several shocks are considered, and their implications for Euro area growth and inflation are examined. In particular, shocks to US growth, the nominal interest rate and the exchange rate of the Euro against the US dollar are discussed.