An Estimated Two-Country DSGE Model to Analyse Monetary Policy with Heterogeneous Agents : Euro Area and the US Economy

Abstract This paper seeks to quantitatively assess the key role in an open economy of heterogeneity in the conduct of monetary policy in the Euro area and the US. We take into account the fact that these two economies trade with each other and with the rest of the world, as well as the role played by the exchange rate in their trade. Using Bayesian estimation techniques, we estimate two models that take these specificities into account, one with representative agents (RANK model), the other with heterogeneous agents (TANK model). Analysis of the Bayes ratio and the characteristics of the two models shows that the TANK model plays a key role in the conduct of monetary policy in the Euro area and the US, and in mitigating cycles and fluctuations. The US economy is more sensitive to heterogeneity than the Euro area economy, as the differences in parameters between the models are greater in the US than in the Euro area. JEL Classification: E21 , E31 , E40 , E50 , E52 , E61