Stock market wealth effects in an estimated DSGE model for Hong Kong

This paper develops and estimates an open economy dynamic stochastic general equilibrium (DSGE) model of the Hong Kong economy. The model features short-run price rigidities generated by monopolistic competition and staggered reoptimisation. The model is enhanced with wealth effects due to stock price dynamics, which we believe to be important. For this reason we adopt a perpetual youth approach. Model parameters and unobserved components are estimated with a Bayesian maximum likelihood procedure, conditional on prior information concerning the values of parameters.DSGE models; wealth effects; open economy; Hong Kong

Controlled dismantlement of the euro area in order to preserve the European Union and Single European Market

The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency's demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries' inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times. Europe consists of nation states that constitute the major axes of national identity and major sources of government's legitimisation. Staying within the euro zone may sentence some countries - which, for whatever reason, have lost or may lose competitiveness - to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone, threatening the future of the whole EU and Single European Market. In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market

An estimated DSGE model for the German economy within the euro area

This paper presents an estimated DSGE model for the European Monetary Union. Our approach, contrary to the previous studies, accounts for heterogeneity within the euro area. We advance the empirical literature by estimating an open-economy model with unfiltered data, which is a much more challenging task than a similar exercise done in the closedeconomy framework. In the estimation we utilize disaggregated information, employing single country data, along with the aggregated EMU data by Fagan et. al (2001). We also contribute to the literature by proposing a strategy for consistent estimation of the currency union model, using information available prior to the adoption of the single currency and afterwards. This approach requires the determination of two separate data generating processes - here these are theoretical DSGE models - corresponding to both current and historical monetary regimes. We emphasize the use of regime-switching models in the DSGE framework (in our case the threshold is known exactly and the switch is permanent). The approach is illustrated by developing a simple tworegion DSGE model, with a particular focus on analyzing the German economy within EMU, and its Bayesian estimation on the sample 1980:q1- 2003:q4. Moreover, the paper offers: (i) a robustness check of the estimation results with respect to the alternative data approaches and various restrictions imposed on the model's structure, (ii) assessments of the relative importance of various shocks and frictions for explaining the model dynamics and (iii) an evaluation of the model's empirical properties. --

An estimated DSGE model for the German economy within the euro area

This paper presents an estimated DSGE model for the European Monetary Union. Our approach, contrary to the previous studies, accounts for heterogeneity within the euro area. We advance the empirical literature by estimating an open-economy model with unfiltered data, which is a much more challenging task than a similar exercise done in the closedeconomy framework. In the estimation we utilize disaggregated information, employing single country data, along with the aggregated EMU data by Fagan et. al (2001). We also contribute to the literature by proposing a strategy for consistent estimation of the currency union model, using information available prior to the adoption of the single currency and afterwards. This approach requires the determination of two separate data generating processes - here these are theoretical DSGE models - corresponding to both current and historical monetary regimes. We emphasize the use of regime-switching models in the DSGE framework (in our case the threshold is known exactly and the switch is permanent). The approach is illustrated by developing a simple tworegion DSGE model, with a particular focus on analyzing the German economy within EMU, and its Bayesian estimation on the sample 1980:q1- 2003:q4. Moreover, the paper offers: (i) a robustness check of the estimation results with respect to the alternative data approaches and various restrictions imposed on the model's structure, (ii) assessments of the relative importance of various shocks and frictions for explaining the model dynamics and (iii) an evaluation of the model's empirical properties

Stock market wealth effects in an estimated DSGE model for Hong Kong

This paper develops and estimates an open economy dynamic stochastic general equilibrium (DSGE) model of the Hong Kong economy. The model features short-run price rigidities generated by monopolistic competition and staggered reoptimisation. The model is enhanced with wealth effects due to stock price dynamics, which we believe to be important. For this reason we adopt a perpetual youth approach. Model parameters and unobserved components are estimated with a Bayesian maximum likelihood procedure, conditional on prior information concerning the values of parameters

Stock market wealth effects in an estimated DSGE model for Hong Kong

This paper develops and estimates an open-economy dynamic stochastic general equilibrium (DSGE) model of the Hong Kong economy. The model features short-run price rigidities generated by monopolistic competition and staggered reoptimization. We devote special attention to asset prices and wealth effects, which we believe to be important. For this reason we adopt a perpetual-youth approach. Model parameters and unobserved components are estimated with a Bayesian maximum likelihood procedure, conditional on prior information concerning the values of parameters. The estimations identify substantial wealth effects and indicate that the nominal interest rate responds to unexpected movements in stock prices.DSGE models Wealth effects Open economy Hong Kong