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Mr. Maxym Kryshko
When estimating DSGE models, the number of observable economic variables is usually kept small, and it is conveniently assumed that DSGE model variables are perfectly measured by a single data series. Building upon Boivin and Giannoni (2006), we relax these two assumptions and estimate a fairly simple monetary DSGE model on a richer data set. Using post-1983 U.S.data on real output, inflation, nominal interest rates, measures of inverse money velocity, and a large panel of informational series, we compare the data-rich DSGE model with the regular - few observables, perfect measurement - DSGE model in terms of deep parameter estimates, propagation of monetary policy and technology shocks and sources of business cycle fluctuations. We document that the data-rich DSGE model generates a higher implied duration of Calvo price contracts and a lower slope of the New Keynesian Phillips curve. To reduce the computational costs of the likelihood-based estimation, we employed a novel speedup as in Jungbacker and Koopman (2008) and achieved the time savings of 60 percent.
Mr. Ivan Tchakarov and Mr. Selim A Elekdag
Emerging market countries have enjoyed an exceptionally favorable economic environment throughout 2004, 2005, and early 2006. In particular, accommodative U.S. monetary policy in recent years has helped create an environment of low interest rates in international capital markets. However, if world interest rates were to take a sudden upward course, this would lead to less hospitable financing conditions for emerging market countries. The purpose of this paper is to measure the effects of world interest rate shocks on real activity in Thailand. The analysis incorporates balance sheet related credit market frictions into the IMF’s Global Economy Model (GEM) and finds that Thailand would best minimize the adverse effects of rising world interest rates if it were to follow a flexible exchange rate regime.
Mr. Maxym Kryshko
Dynamic factor models and dynamic stochastic general equilibrium (DSGE) models are widely used for empirical research in macroeconomics. The empirical factor literature argues that the co-movement of large panels of macroeconomic and financial data can be captured by relatively few common unobserved factors. Similarly, the dynamics in DSGE models are often governed by a handful of state variables and exogenous processes such as preference and/or technology shocks. Boivin and Giannoni(2006) combine a DSGE and a factor model into a data-rich DSGE model, in which DSGE states are factors and factor dynamics are subject to DSGE model implied restrictions. We compare a data-richDSGE model with a standard New Keynesian core to an empirical dynamic factor model by estimating both on a rich panel of U.S. macroeconomic and financial data compiled by Stock and Watson (2008).We find that the spaces spanned by the empirical factors and by the data-rich DSGE model states are very close. This proximity allows us to propagate monetary policy and technology innovations in an otherwise non-structural dynamic factor model to obtain predictions for many more series than just a handful of traditional macro variables, including measures of real activity, price indices, labor market indicators, interest rate spreads, money and credit stocks, and exchange rates.
Mr. Eswar S Prasad
This paper extends the equilibrium business cycle framework to incorporate ex ante skill heterogeneity among workers. Consistent with the empirical evidence, skilled and unskilled workers in the model face the same degree of cyclical variation in real wages although unskilled workers are subject to substantially higher procyclical variation in employment. Systematic cyclical changes in the average skill level of employed workers are shown to induce bias in aggregate measures of cyclical variation in the labor input, productivity, and the real wage. The introduction of skill heterogeneity improves the model’s ability to match the empirical correlation between total hours and the real wage but the correlation between total hours and labor productivity remains higher than in the data.
Michal Brzoza-Brzezina, Marcin Kolasa, and Krzysztof Makarski
We study the macroeconomic effects of the COVID-19 epidemic in a quantitative dynamic general equilibrium setup with nominal rigidities. We evaluate various containment policies and show that they allow to dramatically reduce the welfare cost of the disease. Then we investigate the role that monetary policy, in its capacity to manage aggregate demand, should play during the epidemic. According to our results, treating the observed output contraction as a standard recession leads to overly expansionary policy. Finally, we check how central banks should resolve the trade-off between stabilizing the economy and containing the epidemic. If no administrative restrictions are in place, the second motive prevails and, despite the deep recession, optimal monetary policy is in fact contractionary. Conversely, if sufficient containment measures are introduced, central bank interventions should be expansionary and help stabilize economic activity.
International Monetary Fund
This Selected Issues paper for Thailand highlights the effect of higher global interest rates on Thailand and the relationship between financial crises and long-term potential growth. Since the Asian crisis, Thailand has adopted an inflation targeting regime, and has intervened in the foreign exchange market to prevent excessive baht volatility. The monetary tightening in the United States in 1994 has been followed by heightened bond market volatility and a widening of emerging countries’ credit spreads.
Davide Debortoli, Mr. Jinill Kim, Jesper Lindé, and Mr. Ricardo C Nunes
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
International Monetary Fund. Fiscal Affairs Dept.
This report provides to the Ministry of Finance a review of the current mass valuation appraisal system, and further policy directions on improved tax design for a property tax that would not invite Constitutional challenge, especially in respect of tax base definition, tax rate policy, and tax relief. These measures combined would broaden the base with less rate discrimination. The mission identified the following key structural problems as to the design of the real property tax and suggested corrective steps with the view to improving collections from property taxes across Slovenia
International Monetary Fund. External Relations Dept.
This paper discusses the structural adjustment in low-income countries. In the first 20 months of its operations, the IMF’s structural adjustment facility (SAF) has provided concessional financial assistance to support the balance-of-payments adjustment efforts of 21 low-income member countries. Most SAF arrangements have supported policy reform programs that have also received support under other IMF facilities. The fundamental concept underlying the SAF is the notion that growth and adjustment are mutually reinforcing.