Comparative simulation analysis of the European multi‐country models

Abstract

AbstractThis paper is a product of the SPES programme on multi‐country models and describes a set of diagnostic simulations on five European‐based multi‐country models. These are the EEC's model QUEST as operated by the Deutsches Institut fur Wirtschaftsforschung (DIW); the GEM model jointly operated by the National Institute of Economic and Social Research and the London Business School; the Oxford Economic Forecasting model; the MIMOSA model used by the Observatoire Francais des Conjonctures Economiques (OFCE) and Centre D'Etudes Prospectives et D'Informations Internationales (CEPII), and OECD's Interlink model. The simulation experiments are designed to clarify the interdependencies and relative structures of the major European economies using both (internal) single‐country and external common shocks.All the models tend to adopt similar specifications across the different countries but differences in simulation responses still occur and cross‐model differences often dominate those between countries. Several general qualitative conclusions can be drawn, however. For example, independent fiscal policy under a monetary policy of fixed real interest rates has only limited power to raise output, although full crowding out does not occur. Spillover effects to the other European economies are weak with respect to independent fiscal expansions but stronger for an external shock.The model comparisons reveal differences in modelling strategies, notably with respect to the treatment of inflation on consumption, the role of activity on import behaviour and the influence of excess demand on wages. These; are all key factors in explaining simulation differences between the models. Not all the models currently have endogenous exchange rate determination and this becomes an essential requirement for analysis of non‐EMS and EMS‐style regimes.