A model of the G-3

This paper presents a model of the G3 countries with a theoretically consistent model of the supply side, including a single regional model of the Euro area based on consistent aggregation. This is estimated using recent developments in econometrics for handling non-stationary data. It also uses alternative approaches to expectations formation, with an emphasis on bounded rationality. This retains the assumption of informed agents without making the extreme informational requirements of the REH. Our simulations show that under learning, the response of the economy to shocks may be extremely long lasting.