THE EFFECTS OF EURO AREA INTEREST RATE CHANGES: EVIDENCE FROM MACROECONOMIC MODELS

This paper examines the effects of changes in Euro Area interest rates using macroeconomic models. It examines the results of a harmonised monetary policy simulation at the Euro Area level using the National Institute of Economic and Social Research's Global Economic Model (NiGEM) and the European Central Bank's Area Wide Model (AWM). Comparison is also drawn with the aggregate results from Euro Area National Central Bank models as reported in van Els et al.(2001). Overall, the results across the different models are broadly consistent with what might be regarded as the stylised facts of the monetary transmission mechanism. That is to say that, following a policy tightening, there is an initial fall in output consisting of a more pronounced investment response and a less pronounced consumption response. This output fall is accompanied by protracted price dynamics.