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Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek
This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek

This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.

Lien Laureys, Mr. Roland Meeks, and Boromeus Wanengkirtyo

multiple sources of disturbance. Little is known about how, if at all, monetary policy should operate to reduce financial volatility in this environment. But a recent paper by Debortoli and others (2018; hereafter, DKLN) offers reasons to suspect that a straightforward translation of monetary policy messages drawn from studies based on stylized model economies to an empirically-relevant setting may not be warranted. DKLN (2018) establish that in a standard medium-scale DSGE model, the optimal stabilization weight on output gap fluctuations is many times greater than in

Lien Laureys, Mr. Roland Meeks, and Boromeus Wanengkirtyo
We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilizing inflation, a measure of resource utilization, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions.
Mr. Tobias Adrian, Vitor Gaspar, and Mr. Francis Vitek

Copyright Page © 2022 International Monetary Fund WP/22/15 IMF Working Paper Monetary and Capital Markets Department, and Fiscal Affairs Department A Medium-Scale DSGE Model for the Integrated Policy Framework Prepared by Tobias Adrian, Vitor Gaspar and Francis Vitek* Authorized for distribution by Tobias Adrian and Vitor Gaspar January 2022 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author

International Monetary Fund. European Dept.

Welfare Cost of Uncertain Tax Policy ,” Journal of Public Economics , 37 ( 2 ), pp. 129 – 145 . Zubairy , S. , 2014 , “ On Fiscal Multipliers: Estimates from a Medium Scale DSGE Model ,” International Economic Review , Vol. 55 , pages 169 – 195 . 1 This section provides a brief description of the main features of the model. For a more detailed discussion, see Appendix I and Fournier (2019) . 2 See the Selected Issues Paper “ The Appropriate Fiscal Stance in France: A Model Assessment ”. 3 This reflects information available on 6

International Monetary Fund. European Dept.
This Selected Issues paper analyzes Belgium’s fiscal stance using a structural stochastic model. This note uses a theoretical model that explicitly accounts for the trade-offs between the short-term cost of fiscal tightening and the long-term gains associated with higher fiscal buffers. This paper shows that once the current crisis is over, rebuilding fiscal buffers is essential to helping Belgium confront the next shock from a stronger fiscal position. Overall, this illustrates a major motivation for a credible medium-term fiscal consolidation strategy. When a government reduces debt, it increases its capacity to react to shocks later. This entails a short-term cost that is, in the case of Belgium, worth the effort as this capacity to smooth future shocks increases future welfare. In addition, a large capacity to react with fiscal policy reduces the risk of long-lasting effects of a large crisis. Historical data show that in the past, the Belgium government’s reaction to the cycle was limited to a single event. By contrast, if Belgium could firmly anchor public debt on a downward path, future governments would be able to offset downturns while keeping debt sustainability concerns under control.
International Monetary Fund. European Dept.

,” Journal of Public Economics , 37 ( 2 ), pp. 129 – 145 . Zubairy , S. , 2014 , “ On Fiscal Multipliers: Estimates From a Medium Scale DSGE Model ,” International Economic Review , Vol. 55 , pages 169 – 195 . 1 Prepared by Jean-Marc Fournier (FAD). 2 This section provides a brief description of the main features of the model. For a more detailed discussion, see Appendix I and Fournier (2019) . 3 With an elasticity of interest rate to debt in line with the empirical literature, a rational government should react to rising interest

Michal Andrle

estimation methods, their revision properties, and news effects. The first part of the paper briefly introduces a linear state-space form and establishes its filter interpretation, its weights, and observables decomposition of the filter and forecasts. The second part deals with missing observations and illustrates a procedure to impose expert judgment on the filter exercise, together with adjustments required to carry out the observable decompositions. The third section provides examples of the analysis using the medium-scale DSGE model by Smets and Wouters (2007