Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and EU Using Indirect Inference

We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU.