The available empirical evidence suggests that non-negligible differences in economic structures persist among euro area countries. Because of these asymmetries, an area-wide modelling approach is arguably less reliable, from a strictly statistical viewpoint, than a multi-country one. This paper revolves around the following issue: are those (statistically detectable) asymmetries of any practical relevance when it comes to supporting monetary policy decision-making? To answer this question, we compute optimal parameter values of a Taylor-type rule, using two simple area-wide and multi-country models for the three largest economies in the euro area, and compare the corresponding optimized loss functions. The results suggest that the welfare under performance of an area-wide modelling approach is likely to be far from trifling.
Published in 2010 in: Applied Economics, v. 42, 19-21, pp. 2399-2415
