An estimated DSGE model for the German economy within the Euro area

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This paper presents an estimated DSGE model for the European Monetary Union, addressing heterogeneity within the euro area. Unlike previous studies, it employs an open-economy model with unfiltered data, a more complex task than similar closed-economy exercises. The estimation utilizes disaggregated information, incorporating single country data alongside aggregated EMU data from Fagan et al. (2001). A significant contribution is the proposed strategy for consistent estimation of the currency union model, leveraging information from before and after the adoption of the single currency. This necessitates identifying two distinct data-generating processes, represented by theoretical DSGE models for current and historical monetary regimes. The paper emphasizes regime-switching models within the DSGE framework, where the threshold is precisely known and the switch is permanent. A simple two-region DSGE model is developed, focusing on the German economy within EMU, with Bayesian estimation conducted on data from 1980:q1 to 2003:q4. Additionally, the paper includes: (i) robustness checks of estimation results against alternative data approaches and model structure restrictions, (ii) assessments of the relative importance of various shocks and frictions in explaining model dynamics, and (iii) an evaluation of the model's empirical properties.