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We thank participants in the ECB Workshop on “DSGE models and their use in monetary policy”, the San Francisco Fed/SIEPR Conference on “Macroeconomic models for monetary policy ” and the NBER/EEA International Seminar on Macroeconomics (ISOM) and in particular our discussants, Harris Dellas, Stefano Siviero, Peter Ireland, Lars

The case of reduction of employers ' social security contributions under a wage norm regime with automatic price indexing of wages _______________________________

the views of the National Bank of Belgium.

Conference

This paper, first, develops and estimates a stochastic dynamic general equilibrium (SDGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation and is estimated using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of eight orthogonal structural shocks (including productivity, labour supply, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. For example, it is found that productivity shocks account for only 10 percent of the long run variance in output. Using the estimated model, the paper then analyses the output (real interest rate) gap, defined as the difference between the actual and the flexible-price level of output (real interest rate). Finally, the estimated model is also used to analyse optimal monetary policy. Key words: SDGE models; monetary policy; euro area

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This paper develops and estimates a stochastic dynamic general equilibrium (SDGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate). Key words: SDGE models; monetary policy; euro area

The views expressed in this paper are those of the authors and do not necessarily reflect the views of the National Bank of Belgium. As this paper is part of an ongoing research project on economic thought and European integration, I am indebted to many persons for fascinating discussions and suggestions. A