QUEST III, the global macro-economic model of DG ECFIN
QUEST III is the global macroeconomic model DG ECFIN uses for macroeconomic policy analysis and research. QUEST III belongs to the class of New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) models that are now widely used by international institutions and central banks and that have become the workhorse of modern macroeconomic modelling. These models have rigorous microeconomic foundations derived from utility and profit optimisation and include frictions in goods, labour and financial markets. With empirically plausible estimation and calibration they are able to fit the main features of the macroeconomic time series. The QUEST III model has been estimated on euro area and US data using Bayesian estimation methods.
In order to deal with the wide range of policy issues in DG ECFIN, different model versions of the QUEST III model have been constructed, each with a specific focus and regional and sectoral disaggregation. Many of the main applications deal with fiscal and monetary policy interactions and either use a one-sector model or models that explicitly distinguish tradables and nontradables sectors. New model variants also include housing and collateral constraints. For the analysis of structural reforms we use an extended version of the QUEST III model that captures both investment in tangibles and intangibles (R&D), and disaggregates employment into three skill categories. Adopting the Jones knowledge production function technological change is semi-endogenous and this model is used to analyse alternative policies to promote R&D. A new model variant used to analyse energy and climate change policies includes energy production and directed technological change. All these models are employed using different country disaggregations, focussing on the euro area or EU27 as a whole, and other global regions, or on individual member states.
The models are developed by the modelling unit in DG ECFIN. The Joint Research Centre of the European Commission supports QUEST development providing econometric, computational and methodological expertise in estimation and calibration, maintaining dedicated IT resources.
An update of some new developments of the QUEST III models was described in ECFIN Research Letter Vol.3.Issue 1/2009 (pp 10-13).