A SMALL ESTIMATED EURO AREA MODEL WITH RATIONAL EXPECTATIONS AND NOMINAL RIGIDITIES
Abstract The objective of this paper is to estimate a small model of the euro area to be used as a laboratory for evaluating the performance of alternative monetary policy strategies. We start with the relationship between output and inflation and investigate the fit of the nominal wage contracting model due to Taylor (1980) and three different versions of the relative real wage contracting model proposed by Buiter and Jewitt (1981) and estimated by Fuhrer and Moore (1995a) for the United States. While Fuhrer and Moore reject the nominal contracting model and find strong evidence in favor of the relative contracting model which induces a higher degree of inflation persistence, we find that ...
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