This paper presents and estimates a stochastic dynamic general equilibrium (SDGE) model for the euro area using a Bayesian approach. The model incorporates various frictions, including sticky prices and wages, habit formation, and variable capital utilisation. It is estimated using seven key macroeconomic variables: real GDP, consumption, investment, prices, real wages, employment, and the nominal interest rate. The model includes ten orthogonal structural shocks, including productivity, labour supply, investment, preference, cost-push, and monetary policy shocks, to analyze their effects on the euro area economy. The model is estimated using Bayesian techniques, with the parameters and stochastic processes of the structural shocks determined by minimizing the posterior distribution of the model parameters based on the linearized state-space representation of the SDGE model. The estimated SDGE model performs better than standard VARs and at least as well as the best BVAR considered, suggesting that the model is sufficiently rich to capture the stochasticities and dynamics in the data. The estimation procedure yields plausible estimates for the structural parameters of the sticky price and wage SDGE model. The euro area exhibits considerable price stickiness, which is important for explaining the empirical persistence of inflation. The elasticity of labour supply is estimated to be relatively high, which has important implications for how the natural output level responds to structural shocks. The analysis of the effects of various structural shocks on the euro area economy shows that these effects are generally in line with existing evidence. For example, a temporary monetary policy tightening has a hump-shaped negative effect on output and inflation. A positive productivity shock leads to a gradual increase in output, consumption, investment, and real wages, but has a negative impact on employment. The introduction and estimation of a set of orthogonal structural shocks allows us to examine the relative contribution of various shocks to the empirical dynamics of macroeconomic time series in the euro area. Three structural shocks—preference shock, labour supply shock, and monetary policy shock—explain a significant fraction of output, inflation, and interest rates at the medium to long-term horizon. The price mark-up shock is an important determinant of inflation, while the productivity shock determines about 10% of output variations. The paper also uses the model to calculate the potential output level and real interest rate and the corresponding gaps. The efficient output level is defined as the output level driven by supply and demand shocks when prices and wages are flexible. The confidence bands around these estimated gaps are quite large, indicating uncertainty in the estimates.This paper presents and estimates a stochastic dynamic general equilibrium (SDGE) model for the euro area using a Bayesian approach. The model incorporates various frictions, including sticky prices and wages, habit formation, and variable capital utilisation. It is estimated using seven key macroeconomic variables: real GDP, consumption, investment, prices, real wages, employment, and the nominal interest rate. The model includes ten orthogonal structural shocks, including productivity, labour supply, investment, preference, cost-push, and monetary policy shocks, to analyze their effects on the euro area economy. The model is estimated using Bayesian techniques, with the parameters and stochastic processes of the structural shocks determined by minimizing the posterior distribution of the model parameters based on the linearized state-space representation of the SDGE model. The estimated SDGE model performs better than standard VARs and at least as well as the best BVAR considered, suggesting that the model is sufficiently rich to capture the stochasticities and dynamics in the data. The estimation procedure yields plausible estimates for the structural parameters of the sticky price and wage SDGE model. The euro area exhibits considerable price stickiness, which is important for explaining the empirical persistence of inflation. The elasticity of labour supply is estimated to be relatively high, which has important implications for how the natural output level responds to structural shocks. The analysis of the effects of various structural shocks on the euro area economy shows that these effects are generally in line with existing evidence. For example, a temporary monetary policy tightening has a hump-shaped negative effect on output and inflation. A positive productivity shock leads to a gradual increase in output, consumption, investment, and real wages, but has a negative impact on employment. The introduction and estimation of a set of orthogonal structural shocks allows us to examine the relative contribution of various shocks to the empirical dynamics of macroeconomic time series in the euro area. Three structural shocks—preference shock, labour supply shock, and monetary policy shock—explain a significant fraction of output, inflation, and interest rates at the medium to long-term horizon. The price mark-up shock is an important determinant of inflation, while the productivity shock determines about 10% of output variations. The paper also uses the model to calculate the potential output level and real interest rate and the corresponding gaps. The efficient output level is defined as the output level driven by supply and demand shocks when prices and wages are flexible. The confidence bands around these estimated gaps are quite large, indicating uncertainty in the estimates.