Chapter 2: The area-wide model
Alistair Dieppe1 INTRODUCTION This chapter summarizes the main features of the area-wide model (AWM). The model was created at the onset of monetary union with the aim of providing insights into economic developments in the euro area as a whole. A more detailed analysis of the model can be found in Fagan et al. (2001). Over the past ﬁve years some revisions have been made to the model, including updating of some of the equations (see Dieppe and Henry, 2004, for details). 2 THE USES OF THE MODEL The model is currently used in the context of two diﬀerent types of tasks: forecasting and policy analysis. Forecasts in the ECB are complex exercises in which judgmental and econometric considerations as well as area-wide and country perspectives are all taken into account. Describing the complex interaction underlying these exercises is beyond the scope of this chapter (see ECB, 2001), but this process has an important impact on the way the model is used. The model-based component of the forecast serves two purposes: ﬁrstly, as a consistency-checking device, ensuring that the picture as a whole conveyed by the forecast is a coherent one; secondly, as a technical tool able to build (relatively quickly) alternative views of the forecast. Policy analysis is performed through shock simulations and the exercises are varied in their implementation owing to the wide-ranging nature of the question that the model is addressing. In addition, the model has been used in research to address various questions relating to...
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