Macroeconomic Modelling in EMU: How Relevant is the Change in Regime?

We analyse the likely effects of changes in the monetary and financial regimes of EMU countries on the dynamics of output and inflation. In particular, we evaluate the impact of the regime shift on the forecasting performance of reduced-form models. Data for both the pre-EMU and the EMU regimes are generated by a relatively standard open-economy-DSGE model with sticky prices and wages and restricted access to financial markets for some individuals. We find that the effects of the shift in the monetary regime on the processes followed by macroeconomic variables depend on the nature of the shocks hitting the economy. For plausible shocks distributions the reduction in the accuracy of VAR-base…