2010 Central Bank Macroeconomic Modeling Workshop
Theme: DSGE Models for Emerging Market Economies
Venue: Manila Peninsula Hotel, Makati City
            Metro Manila, PHILIPPINES
Date   : 19-20 October 2010 (Tuesday and Wednesday)
Website: http://www.bsp.gov.ph/events/2010/cbmmw/index.htm

2010 CBMMW Conference Papers


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NoAuthor / Title / Abstract
1.Author(s): Harmanta, Muchamad Barik Bathaluddin, and Jati Waluyo
Affiliation(s): Bank Indonesia

Title: Inflation targeting under imperfect credibility based on ARIMBI: Lessons from Indonesian experience

Abstract:

A small open economy model originally based on GPM IMF (Carabenciov et.al, 2008), namely ARIMBI (Aggregate Rational Inflation – Targeting Model for Bank Indonesia) is developed to analyze how monetary policy affects the economy and how optimal policy should be designed. The model employs a New-Keynesian Phillips Curve (NKPC), an expectation IS curve, an uncovered interest parity (UIP) equation and a monetary policy rule which are basically derived from microfoundation of economic agents’ behaviours. In addition, we also study how credibility affects these dynamic variables by incorporating add-hoc credibility variable in two alternatives ways : exogen and endogen. We measure current value for the credibility index of Indonesian monetary policy as an initial value. Our quantitative measurements (ala Cecchetti & Krause (2002) among others) found that credibility index seems converging to around 0.5. Refer to projection and simulation results using the model, the study shows expectation inflation of economic agents is strongly influenced by monetary policy credibility. In addition to benefit in term of effectiveness, high credibility is also beneficial in term of efficiency of the monetary policy transmission as disinflation cost (described by sacrifice ratio) would also decrease. We found that under imperfect credibility the central bank prefers to attain its inflation target gradually. Another interesting finding is that if the authority has twice credibility stock then achieving its long-term inflation target required only much shorter time periods (approximately 0.4 periods than the baseline).

Discussant: Douglas Laxton, International Monetary Fund

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2.Author(s): Paul McNelis, Eloisa Glindro, Ferdinand Co, and Francisco Dakila, Jr.
Affiliation(s): Fordham University and Bangko Sentral ng Pilipinas

Title: Macroeconomic model for policy analysis and insight

Abstract:

This paper presents the initial specification and results of the BSP’s DSGE model for the Philippine economy. The development of the model complements existing models used by the BSP for policy simulation. The BSP’s DSGE model is a small open economy model with habit persistence, staggered pricing in home goods production, flexible wage, adjustment cost to investment, and financial frictions. The simulation results from the model illustrate the inter-temporal trade-offs in each decision that policymakers need to take into account. The effects of policy rate reduction on inflation and output are more apparent in the tradable sector whereas fiscal stimulus works via the non-tradable sector. The low fiscal multiplier obtained from the simulation on fiscal stimulus is consistent with the Mundell-Fleming and Dornbusch models, which show that fiscal policy is muted in an economy with flexible exchange rates and capital mobility.

Discussant: Dennis Botman, International Monetary Fund

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3.Author(s): Diana Rose del Rosario
Affiliation(s): Singapore Management University

Title: Monetary policies in a small open economy model with labor mobility and remittances

Abstract:

This paper presents a model of a small open economy that allows for international labor mobility, thereby endogenizing migrant transfers or remittances. The resulting model is calibrated to the Philippine economy, of which labor migration and remittance inflows are key forces that drive the economy’s growth. The model’s impulse response functions illustrate that the presence of these features generates a different set of dynamics from the standard small open economy model (without labor mobility). Depending on the source of the shock, labor mobility and remittances can either exacerbate or cushion the impact of the shock on the economy. A temporary and unanticipated rise in the world interest rate leads to a drop in aggregate output in the environment with labor mobility compared to one without. In contrast, an adverse terms-of-trade shock of the same nature affects output less severely in the case with labor mobility. Finally, a welfare cost comparison of different monetary regimes reveals that policies fostering flexible exchange rates bring about welfare gains relative to a baseline policy of inflation targeting that places a small weight on fixing the nominal exchange rate (otherwise known as hybrid flexible inflation targeting). In particular, pegging the monetary aggregate proves to be welfare-superior to six other simple rules, namely: non-traded price inflation, price-level, strict inflation, hybrid flexible inflation, exchange-rate, and export-price targeting (of which the ranking follows the order of enumeration). The ranking is preserved when labor mobility and remittances are absent in the model.

Discussant: Paul McNelis, Fordham University

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4.Author(s): Szilard Benk, Zoltan Jakab, and Daniel Baksa
Affiliation(s): Fiscal Council of the Republic of Hungary

Title: Does “the” fiscal multiplier exist? Fiscal and monetary reactions, credibility and fiscal multipliers in Hungary

Abstract:

There is a lack of consensus on the effects of fiscal policy measures (the so called fiscal multipliers) both in Hungary and in developed countries. We argue that there is no such a unique fiscal multiplier. The paper considers the economic effects of fiscal policy using an estimated small open economy dynamic stochastic general equilibrium (DSGE) model for Hungary, extended with five types of distortionary fiscal instruments. The estimated GDP fiscal multipliers deliver a set of conclusions: First, there is a significant difference between the multipliers of different types of fiscal expansions. Second, agents’ perception on how permanent the shift in fiscal policy is has sizable implications on the multipliers. Third, multipliers can vary also when we take into account the future ways of financing the expansion (multiplies vary more if tax cuts are financed by cutting expenditures, while they vary less if expenditures are financed from various sources). Regarding monetary reactions, we found that in a small open economy where monetary policy mostly reacts to inflation, accommodative monetary policy barely modifies fiscal multipliers – contrary to findings in closed economies.

Discussant: Josef Yap, Philippine Institute for Development Studies

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5.Author(s): Pietro Cova , Massimiliano Pisani, and Alessandro Rebucci
Affiliation(s): Bank of Italy and Inter-American Development Bank

Title: Macroeconomic effects of China's fiscal stimulus

Abstract:

This paper analyzes the macroeconomic impact of China’s 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on China’s economic activity are sizeable: absent fiscal stimulus China’s GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010, respectively. The effects are stronger under a US dollar peg because of the imported loose monetary policy stance from the United States. Higher Chinese aggregate demand stimulates higher (gross and net) imports from other regions, in particular from Japan and the rest of the world, and, only to a lesser extent, from the United States and the euro area. However, the overall GDP impact of the Chinese stimulus on the rest of the world is limited. These results warn that a fiscal policy-driven increase in China's domestic aggregate demand associated with a more flexible exchange rate regime have only a limited potential to contribute to an orderly resolution of global trade and financial imbalances.

Discussant: Feng Zhu, Bank for International Settlements

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6.Author(s): Takuji Fueki, Ichiro Fukunaga and Masashi Saito
Affiliation(s): Bank of Japan

Title: Assessing the effects of fiscal policy in Japan with estimated and calibrated DSGE models

Abstract:

In this paper, we assess the effects of fiscal policy in Japan using two dynamic stochastic general equilibrium (DSGE) models. One is a medium-scale DSGE model of Japan’s economy estimated using Bayesian techniques. The other is the IMF’s large-scale “Global Integrated Monetary and Fiscal (GIMF)” model (Kumhof, et al., 2010) calibrated to Japan’s and other countries’ data.

Discussant: Michel Juillard, Bank of France and CEPREMAP

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7.Author(s): Ashvin Ahuja, Suchot Piamchol, Paiboon Pongpaichet, Tanawat Ruenbanterng, and Surach Tanboon
Affiliation(s): Bank of Thailand

Title: Impacts of financial factors on emerging market business cycle fluctuations

Abstract:

Our research contributes to a deeper understanding of the interaction between the real and financial sides of the economy by analyzing how balance sheets of not only firms but also banks amplify and propagate business cycles. Based on an open-economy dynamic stochastic general equilibrium model with a double financial accelerator mechanism, our model provides a more complete view of the balance sheet channel of monetary policy transmission and is more useful for an emerging market economy with bank-based financial intermediation than a traditional model with only one financial accelerator.

Discussant: Ichiro Fukunaga, Bank of Japan

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8.Author(s): Sohei Kaihatsu and Takushi Kurozumi
Affiliation(s): Bank of Japan

Title: Sources of business fluctuations: Financial or technology shocks?

Abstract:

Which is the major source of business fluctuations, financial or technology shocks? We incorporate a financial accelerator mechanism into a DSGE model with stochastic trends in neutral and investment-specific technological changes, and estimate this model by Bayesian methods with economic and financial data. Based on the recent empirical finding that a shock to the marginal efficiency of investment mainly drives investment fluctuations and reflects corporate financial conditions for investment spending, our model does not adopt such a shock but introduces two financial shocks to the external finance premium and to entrepreneurs net worth. Our empirical analysis shows that, in both Japan and U.S., the main driving force of output fluctuations is neutral technology shocks, and financial shocks are at least as important for investment fluctuations as technology shocks. Also, external finance premium shocks generate a sharp decline and a subsequent hike in the premium and thereby induce the boom and bust cycles of investment via the financial accelerator mechanism during the late 1980s and the 1990s in Japan and during the period from 2003 onward in U.S.

Discussant: Penelope Smith, Reserve Bank of Australia

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9.Author(s): Jaromir Benes and Michael Kumhof, and David Vavra
Affiliation(s): International Monetary Fund and O.G. Research Ltd.)

Title: Monetary policy and financial stability in emerging-market economies: An operational framework

Abstract:

We develop a simple model that integrates monetary and macroprudential policy transmission, with special reference to emerging-market economies. We illustrate the use of the model by developing a number of hypothetical scenarios that simulate various sources of risk in a typical emerging-market economy: shocks to the country spread, terms-of-trade shocks, and asset price bubbles.

Discussant: Luca Guerrieri, US Federal Reserve Board

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10.Author(s): Pascal Jacquinot, Michal Brzoza-Brzezina and Marcin Kolasa
Affiliation(s): European Central Bank and National Bank of Poland

Title: Can we prevent boom-bust cycles during Euro area accession?

Abstract:

Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare.

Discussant: Stefan Laseen, Sveriges Riksbank

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11.Author(s): Lorenzo Forni, Andrea Gerali and Massimiliano Pisani
Affiliation(s): International Monetary Fund and Bank of Italy

Title: Global oil shocks and the Euro area: An empirical model-based analysis

Abstract:

We assess the impact of oil shocks on euro area macroeconomic variables by estimating with Bayesian methods a new-Keynesian small open economy model. Oil price is determined according to supply and demand conditions in the world oil market. We get the following results. First, the impact of an increase in the price of oil depends upon the underlying source of variation. When the driver of higher oil prices is the increase in the aggregate demand in the trade partners of the euro area, both euro area GDP and CPI inflation increase. To the opposite, negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro area economy. Second, a positive aggregate demand shock in euro area trade partners tends to generate a trade balance surplus and an oil trade deficit in the euro area. To the opposite, unanticipated increases in the oil-demand specific and unanticipated oil supply disruptions cause a trade balance deficit in the euro area. Third, oil price shocks have a large and immediate effect on the fuel component of euro area CPI and muted impact on the non-fuel component of euro area CPI and euro area GDP. Fourth, the increase in the price of oil during the 2000s did not induce stagflationary effects on the euro area economy because it was associated with positive aggregate demand shocks in the main trade partners of the euro area. A similar reason (the drop in foreign aggregate demand) contributes to explain the recent simultaneous drop in oil prices, euro area GDP and inflation (in particular its fuel component).

Discussant: Rhys Mendes, Bank of Canada

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12.Author(s): Martin Bodenstein, Christopher Erceg, and Luca Guerrieri
Affiliation(s): US Federal Reserve Board

Title: The effects of foreign shocks when interest rates are at zero

Abstract:

In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed-economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country; conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding.

Discussant: Sohei Kaihatsu, Bank of Japan

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13.Author(s): Stefan Laséen and Lars E.O. Svensson
Affiliation(s): Sveriges Riksbank

Title: Anticipated alternative instrument-rate paths in policy simulations

Abstract:

Anticipated alternative instrument-rate paths in policy simulations Stefan Laséen and Lars E.O. Svensson (Sveriges Riksbank) Discussant: Paul McNelis Fordham University

Discussant: Paul McNelis, Fordham University

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