The ECB's New Multi-Country Model for the euro area: NMCM — Simulated with rational expectations

The model presented here is an estimated medium-scale New Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenario analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elasticities of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions.We assume that agents optimise under limited information where each agent knows only the parameters related to his/her optimisation problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depend strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible.     

Explaining UK wage inequality in the past globalisation period, 1880–1913

The current era of globalisation has witnessed a rising premium paid to skilled workers resulting in increasing wage inequality in most OECD countries. This pattern differs from that observed during the past globalisation period (1880–1913), in which wage inequality decreased in most of the Old World countries. The present debate over wage inequality focuses on the implications of globalisation, technological change, the role of labour market institutions and education. Similar factors were at work in the past globalisation process. In order to disentangle the main factors that contribute to wage inequality, we calibrate a general equilibrium model for the UK economy in the past globalisation period. The results show that a trade shock and a skilled-biased technology shock increased wage inequality. However, education and emigration had a more significant impact and led to a decrease in wage inequality.