EU Science Hub

Macroeconomic analysis for monitoring EU economic stance

The JRC supports the Commission’s Directorate-General (DG) for Economic and Financial Affairs in the development, estimation and simulation of QUEST III, the dynamic stochastic general equilibrium model used by the Commission to analyse the status of the EU economy. QUEST is one of the analytic instruments DG Economic and Financial Affairs uses for monitoring the EU 2020 objectives and the impact of the flagships initiatives, in particular for the integrated surveillance of member countries economic stance, including their fiscal policy, budget imbalances, reform programmes, and overall sustainability of public finances.

QUEST III belongs to the class of Dynamic Stochastic General Equilibrium (DSGE) models that is now widely used by international institutions and central banks and that is the workhorse of modern macroeconomic modelling. QUEST III is used by DG Economic and Financial Affairs for macroeconomic policy analysis. DSGE models have rigorous microeconomic foundations derived from utility and profit optimisation and include frictions in goods, labour and financial markets.

To deal with the wide range of EU policy issues, different model versions have been built, each with a specific focus and regional and sectoral disaggregation. Many of the main applications deal with fiscal and monetary policy interactions. Recent model variants include housing and financial sectors. QUEST III has been estimated on euro area, EU member countries and US data using Bayesian estimation methods. These model estimations are used for example to analyze imbalances and rebalancing scenarios for Euro Area Member Countries and to study the interaction between fiscal policy and the banking system. Moreover they help understanding the mechanisms driving the business cycle as well as the impact of fiscal policies in the context of the current economic scenario.

DSGE models also require the use of advanced computational and methodological tools. In this context JRC contributes to the development of the DYNARE software. DYNARE is a software platform for handling a wide class of economic models, in particular dynamic stochastic general equilibrium (DSGE) and overlapping generations (OLG) models and it is widely used in policy institutions and the Academia.