Transcript Comments on “Actual and Perceived Monetary

Monetary Policy:
Shocks and Effectiveness
Banco Central do Brasil
Rio de Janeiro, 11 July 2003
“The IMF Global Economic Model (GEM)”
Presented By
Alessandro Rebucci
IMF Research Department
Introduction
• Since Obstfeld-Rogoff (JPE, 1995) seminal paper, there
have been numerous theoretical contributions in the socalled NOEM literature
• Complex models, largely not yet brought to the data
• Dornbusch-Mundell-Fleming paradigm not yet supplanted
• However, efforts are now underway at several policy
institutions to use this framework
• The Global Economic Model (GEM) is an attempt at using
this new technology at the IMF
Outline of the presentation
• What is GEM?
• How is GEM solved, calibrated, and evaluated?
• How can GEM be used for macroeconomic analysis and
policy evaluation?
What is GEM?
• GEM (Pesenti, forthcoming IMF WP) is a NOEM model
• NOEM models (unlike MULTIMOD) are SDGE models
with monopolistic competition, nominal rigidities, and
trade derived from specialization, preferences and
technology
• In these models there is an explicit role for monetary
policy, stemming from the distortions mentioned, and an
explicit role for other policies (e.g., fiscal, trade, etc.) could
be introduced.
• In principle, policy evaluation can be welfare-based and
may be more robust to the Lucas critique
• GEM is “richer” than the typical academic NEOM model
GEM is a multi-country, multi-sector model:
Baby GEM’s Structure
C
I
GA*
GA
C*
I*
FINAL
A
GOODS
Q
NN
N
A*
M
M*
Q*
INTERMEDIATE
T
T*
NN*
N*
GOODS
K
L
HOME
L*
FOREIGN
K*
GEM has more shocks and frictions than the typical
NOEM model:
• Technology
(productivity,
depreciation rate)
• Preferences (home
bias, openness, labor
effort)
• Financial
Intermediation (UIP)
• Adjustment costs on
import and investment
• Habit persistence in
consumption
• Segmented good
markets across
countries
• Cost of adjusting
nominal good prices
Standard assumptions on asset markets and
government behavior
• Asset markets complete within countries but incomplete across
countries
• Endogenous monetary policy by means of interest rate rules
• In the current version, Ricardian equivalence holds (representative
agent model, no distortionary taxation)
• Structural reforms may be analyzed in comparative static exercises
How is GEM solved?
• The SS is solved numerically (in portable Troll) by using
an iterative, Newton-Raphson-type algorithm to deal with
large, non-linear models—Juillard and Laxton forthcoming
IMF WP
• The deterministic PF solution of the non-linear model is
obtained by using a variant of this algorithm—Armstrong
et al (1998) and Juillard et al (1998)
• Stochastic RE solutions may be obtained by taking either
first- or higher-order approximations using DYNARE (an
interface for a set of MATLAB tools designed to study
both linear and nonlinear SDGE models, assembled by
Juillard and Laxton and freely available on request from
[email protected])
How is GEM calibrated
and evaluated?
• Thus far, GEM has been calibrated based on information
from various sources: central banks’ “inside” view of the
monetary transmission mechanism, existing literature, and
unconditional moments of the data; no model evaluation
• However, ways to implement parameter estimation and
model evaluation by using available, numerical Bayesian
techniques (e.g., Smets and Wouters, 2003) are now being
explored and a WP will summarize results
• Also, comparable input-output data for a significant
number of countries have now been purchased from
ECOMOD
How has GEM been used for macro
analysis and policy evaluation?
• Monetary rules for emerging, transition economies (Laxton-Pesenti,
JME 2003)
• Explaining the US dollar and trade balance in the late 1990s (HuntRebucci, forthcoming IMF WP)
• Product and labor market liberalization in the euro area (BayoumiLaxton-Pesenti, forthcoming IMF WP and Spring 2003 WEO)
• Transmission of energy price shocks (Hunt, forthcoming US Article IV
Consultation)
• Impact of G3 exchange rate volatility on emerging markets (BayoumiPesenti-Rebucci-Spatafora, forthcoming WEO)
Laxton-Pesenti (2003)
• Ask how to modify interest rate rules for small, open,
transition economies
• Conclude that the interest rate rule that minimizes inflation
and output variability is more aggressive with respect to
inflation and less aggressive with respect to the output gap
than normally found
• Find some role for inertia in the policy rate
• Find no role for the exchange rate over and above its
effects on CPI inflation
Hunt and Rebucci (2003)
• Focus on the US dollar and trade balance in the second
half of the 990s and ask whether the Balssa-Samuelson
effect (BS) of a productivity shock in the tradable sector
may explain their behavior
• Show that BS effect may explain only about half of the
exchange rate appreciation. Some uncertainty about the
shock’s persistence and a broadly defined “capital flow”
are needed to match the data more satisfactorily.
Bayoumi-Laxton-Pesenti (2003)
• Examine the benefits from increasing competition in the euro area
to US levels
• Find that such a change would increase output substantially and
reduces nominal inertia in the euro area:
– There are different effects from increases in competition in labor and
product markets. Labor market reforms have a larger impact on nominal
flexibility, and a lower impact on investment and on the rest of the world.
• There can also be substantial spillovers to the rest of the world. (In
contrast to the domestic effects, these spillovers are sensitive to the
parameterization. In particular, they depend on the degree of
substitutability of home and foreign goods, with lower substitutability
creating greater spillovers.)
Hunt (2003)
• Focuses on the effect of large changes in energy prices and
ask when they can lead to stagflations as seen in the 1970s
• Key difference w.r.t. previous studies is that energy is used
both as an intermediate input in production and consumed
directly
• For large, permanent energy price shocks to be
stagflationary, workers must resist the decline in their real
consumer wage and monetary policy must be
accommodative
Bayoumi-Laxton-Pesenti-RebucciSpatafora (2003)
• Examine effects of G3 exchange rate volatility on emerging markets.
• Three country version of GEM, two large countries (US and EU) and
one small (EM). Volatility modeled as variance of the risk premium
shock. Examine both spillovers to EM under alternative policy and
structural scenarios, and whether reducing G3 exchange rate volatility
would benefit EM given that this may result in greater interest rate
volatility.
• Preliminary results: this kind of volatility raises consumption and
output variability in EM, the more so the higher the level of debt and
the less the currency composition of debt and trade are aligned.
However effects are not large in absolute terms.
• Lower G3 exchange rate volatility does not appear to benefit EM
because of costs from more interest rate volatility, assuming
that variance of risk premium shocks doesn’t fall.
How will GEM be used in the near
future?
• Work in progress on emerging market economies
– Parameterize model to yield “original sin and sudden
stops” to analyze welfare impact of these forms of
financial market incompleteness
– Analyze impact of FTAs on business cycles of
emerging economies
– Compare typical emerging economy in Europe, South
East Asia and Latin America
– Monetary rules for small, open emerging economies
– ...
• Work in progress on other issues
– Add equity trade and FDI to analyze role of capital
flows composition in exchange rate dynamics
– Monetary rules for small, open advanced economies
– Monetary policy under the zero-bound constraint
– Compare welfare analysis of policy rules with results
derived from ad hoc objective functions
– ...