External Shocks and Macroeconomic Policy: Simulations with EUROMON

We carry out a number of policy simulations with DNB's multicountry model, EUROMON. With these simulations we aim to analyse the effectiveness of monetary and fiscal expansion in light of the current global downturn in the US and the Euro area. We thus run two types of simulations in which we examine first, the real and nominal effects of the interest rate reductions implemented over the past year (2002) in both the US and the EU and second compare, the effects of similar macro policies applied across the two continents. Lastly, we investigate the extent to which the current European monetary union creates greater stability for the European economy when faced with external shocks, compared to Europe's resilience under the previous Exchange Rate Mechanism.