I have a question about correcting for heterogeneity in the DSGE model. Suppose I use a model of interaction between fiscal and monetary policies in the euro area, such as the work of Gali (2008). In this case, how is the heterogeneity between countries corrected? Or does the fact that the author considers the Union as a whole makes the heterogeneity disappear?
What do you mean with
The concept of heterogeneity that I am considering applies to the dynamics of the productive structure of countries. In other words, the situation of perpetuation over time of high levels of disparities between countries, sectors, segments, companies etc… For example let us consider the productive structure between Germany and Greece, where we can note a big difference.
In small open economy models, the rest of the world is usually not explicitly modeled/required. It’s different in two-country models where you can parameterize each country separately and therefore choose separate structures and parameters.
Thank you very much, Prof.