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Article

Phuong V. Nguyen

The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New…

Abstract

Purpose

The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Design/methodology/approach

A SOE-NK-DSGE model—Bayesian estimation.

Findings

This paper analyzes the sources of the business cycle fluctuations in Vietnam.

Originality/value

This research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

Keywords

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Book part

Charles N. Noussair, Damjan Pfajfar and Janos Zsiros

We design experimental economies based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We apply shocks to tastes, productivity, and interest rate…

Abstract

We design experimental economies based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We apply shocks to tastes, productivity, and interest rate policy, and measure the persistence of these shocks. We find that, in a setting where goods are perfect substitutes, there is little persistence of output shocks compared to treatments with monopolistic competition, which perform similarly irrespective of whether or not menu costs are present. Discretionary central banking is associated with greater persistence than automated instrumental rules.

Details

Experiments in Macroeconomics
Type: Book
ISBN: 978-1-78441-195-4

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Book part

Enrique Martínez-García, Diego Vilán and Mark A. Wynne

Open-Economy models are central to the discussion of the trade-offs monetary policy faces in an increasingly more globalized world (e.g., Marínez-García & Wynne, 2010)…

Abstract

Open-Economy models are central to the discussion of the trade-offs monetary policy faces in an increasingly more globalized world (e.g., Marínez-García & Wynne, 2010), but bringing them to the data is not without its challenges. Controlling for misspecification bias, we trace the problem of uncertainty surrounding structural parameter estimation in the context of a fully specified New Open Economy Macro (NOEM) model partly to sample size. We suggest that standard macroeconomic time series with a coverage of less than forty years may not be informative enough for some parameters of interest to be recovered with precision. We also illustrate how uncertainty also arises from weak structural identification, irrespective of the sample size. This remains a concern for empirical research and we recommend estimation with simulated observations before using actual data as a way of detecting structural parameters that are prone to weak identification. We also recommend careful evaluation and documentation of the implementation strategy (specially in the selection of observables) as it can have significant effects on the strength of identification of key model parameters.

Details

DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments
Type: Book
ISBN: 978-1-78190-305-6

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Article

Wondemhunegn Ezezew Melesse

The purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules.

Abstract

Purpose

The purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules.

Design/methodology/approach

In order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015.

Findings

The main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities.

Research limitations/implications

The major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively.

Originality/value

Using DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

Details

African Journal of Economic and Management Studies, vol. 10 no. 3
Type: Research Article
ISSN: 2040-0705

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Article

Guangling “Dave” Liu, Rangan Gupta and Eric Schaling

This paper aims to develops an estimable hybrid model that combines the micro‐founded DSGE model with the flexibility of the atheoretical VAR model.

Abstract

Purpose

This paper aims to develops an estimable hybrid model that combines the micro‐founded DSGE model with the flexibility of the atheoretical VAR model.

Design/methodology/approach

The model is estimated via the maximum likelihood technique based on quarterly data on real gross national product (GNP), consumption, investment and hours worked, for the South African economy, over the period of 1970:1 to 2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out‐of‐sample forecasts from the hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1‐2005:4.

Findings

The results indicate that, in general, the estimated hybrid‐DSGE model outperforms the classical VAR, but not the Bayesian VARs in terms of out‐of‐sample forecasting performances.

Research limitations/implications

The model lacks nominal shocks and needs to be extended into a small open economy framework.

Practical implications

The paper was able to show that, even though the DSGE model is outperformed by the BVAR, a microfounded theoretical DSGE model has a future in forecasting the South African economy.

Originality/value

To the best of the authors' knowledge, this is the first attempt to use an estimable DSGE model to forecast the South African economy.

Details

Journal of Economic Studies, vol. 37 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

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Book part

Refet S. Gürkaynak, Burçin Kısacıkoğlu and Barbara Rossi

Recently, it has been suggested that macroeconomic forecasts from estimated dynamic stochastic general equilibrium (DSGE) models tend to be more accurate out-of-sample…

Abstract

Recently, it has been suggested that macroeconomic forecasts from estimated dynamic stochastic general equilibrium (DSGE) models tend to be more accurate out-of-sample than random walk forecasts or Bayesian vector autoregression (VAR) forecasts. Del Negro and Schorfheide (2013) in particular suggest that the DSGE model forecast should become the benchmark for forecasting horse-races. We compare the real-time forecasting accuracy of the Smets and Wouters (2007) DSGE model with that of several reduced-form time series models. We first demonstrate that none of the forecasting models is efficient. Our second finding is that there is no single best forecasting method. For example, typically simple AR models are most accurate at short horizons and DSGE models are most accurate at long horizons when forecasting output growth, while for inflation forecasts the results are reversed. Moreover, the relative accuracy of all models tends to evolve over time. Third, we show that there is no support to the common practice of using large-scale Bayesian VAR models as the forecast benchmark when evaluating DSGE models. Indeed, low-dimensional unrestricted AR and VAR forecasts may forecast more accurately.

Details

VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims
Type: Book
ISBN: 978-1-78190-752-8

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Article

Paul Levine

The purpose of this paper is to describe the transformation of macro‐modelling from reduced form behavioural equations estimated separately, through to contemporary…

Abstract

Purpose

The purpose of this paper is to describe the transformation of macro‐modelling from reduced form behavioural equations estimated separately, through to contemporary microfounded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. It is argued that estimated DSGE models should be seen as probability models that can be used as a laboratory for assessing new policies in a new and uncertain environment. The methodology is particularly relevant for emerging economies such as India.

Design/methodology/approach

This paper has analytical, empirical and policy dimensions. Estimating DSGE models by Bayesian‐Maximum‐Likelihood methods results in a posterior distribution of parameters that quantifies the uncertainty facing the policymaker. This, in turn, can be used for robust policy design.

Findings

The paper reviews evidence that inflation targeting in emerging economies welfare‐dominates exchange rate targeting.

Originality/value

This lies in the papers reviewed including those involving the author.

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Article

Muhammad Rehman, Sajawal Khan, Zafar Hayat and Faruk Balli

In this paper, the authors develop and estimate a small open economy dynamic stochastic general equilibrium (DSGE) model with an enriched micro-founded specification to…

Abstract

Purpose

In this paper, the authors develop and estimate a small open economy dynamic stochastic general equilibrium (DSGE) model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies.

Design/methodology/approach

Although the authors’ specification provides a general frame for the analysis of the role of workers' remittances, they motivate and calibrate the model with specific focus on Pakistan, where most of the trade deficit is met through the remittance channel.

Findings

The results indicate that a negative shock to workers' remittances hampers real growth via decreased consumption and imported investment goods, while it builds pressure on exchange rate and hence worsens current account balance. These results indicate that too much dependence on workers' remittances to help meet foreign exchange deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances.

Originality/value

The authors develop and estimate a small open economy DSGE model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies.

Details

Journal of Economic Studies, vol. 47 no. 6
Type: Research Article
ISSN: 0144-3585

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Article

Mehmet Balcilar, Rangan Gupta and Charl Jooste

The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.

Abstract

Purpose

The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.

Design/methodology/approach

The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty.

Findings

The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters – high uncertainty can lead to a severe contraction in output, inflation and interest rates.

Research limitations/implications

The authors model only a few variables in the SVAR – thus missing perhaps other possible channels of shock transmission.

Practical implications

There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates.

Originality/value

This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.

Details

Journal of Economic Studies, vol. 44 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Content available
Article

Sherine Al-shawarby and Mai El Mossallamy

This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the…

Abstract

Purpose

This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules.

Design/methodology/approach

The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation.

Findings

The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process.

Originality/value

A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

Details

Review of Economics and Political Science, vol. 4 no. 2
Type: Research Article
ISSN: 2631-3561

Keywords

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