DSGE Model

This paper contributes to the development of the next generation of Forecasting and Policy Analysis System (FPAS) by formulating, estimating and conducting a forecast evaluation of a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model customized for Pakistan. The DSGE model in this paper contributes through addition of the detailed fiscal and external sectors of the economy. The fiscal block models the behavior of government expenditures, tax revenues and government debt, and allows for government borrowing from the central bank that affects monetary growth. Key additions to a conventional external sector block include the introduction of transaction costs in international borrowing and lending, which weaken the link between returns on domestic assets and the exchange rate adjusted returns on foreign assets. Further, to analyze the dynamics of major components of inflation, CPI is disaggregated in three components: core, food and oil inflation. Application of the model...

Stock returns could be predictable due to time-varying expected returns. In this paper, we model the conditional expected return as an unobservable state variable affected directly by the expected components of predictors. This ap- proach separates the different roles played by expected versus unexpected pre- dictors, while avoiding both the "error-in-variables" problem due to imperfect predictors and bias due to persistent predictors in a typical predictive regres- sion. In addition, the feature of negative correlation between an innovation in the expected return and the unexpected stock return is built into the model from imposing the return identity. At the same time, the unexpected components in predictors are allowed to co-move with the unexpected cash flow component of the stock return. This flexible correlation structure improves the efficiency in estimating the conditional expected returns. More importantly, we are able to study the role of predictors in forming th...

This article assesses the Riksbank’s forecasts of imported infl ation and dis-cusses to what extent errors in this respect have affected the Bank’s fore-casts of overall infl ation. The assessment mainly refers to the period from 2000 onwards. The results show that infl ation about two years ahead was overestimated in the Riksbank’s forecasts by an average of about 0.2 percentage points per quarter. The Riksbank also tended to count on the kronor being stronger than was actually the case, particularly about one year ahead. This tendency was offset, however, by an overestimation of changes in foreign prices and margins, which has accordingly lowered the error in forecasting imported infl ation. The forecast error in imported infl ation may have been of relatively considerable importance for the infl ation forecasts in certain periods but – according to the simulations for this article – not in the whole of the period considered here.

This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. For the Euro Area as a whole, the deterioration of the tradeoff becomes insignificant with Draghi's "whatever it takes" announcement onwards. However, a more detailed analysis shows that the detrimental effect of the Euro is more severe and long-lasting for peripheral countries, pointing to structural differences among Euro Area countries as a key element of the detrimental effect of the Euro. We base our results on a novel empirical strategy that, consistently with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adoption of the Euro.

This paper investigates macroeconomic effects of bank regulation in a continuoustime macro-finance framework with both bond-financing and bank-financing. Risky firms appreciate bank credit because banks are efficient at liquidating assets for troubled firms. However, risky firms must pay the risk premium for banks’ exposure to aggregate risks. Our framework captures the feature that the cost of bank-financing endogenously fluctuates and the fact that bond-financing is less volatile and cyclical than bank-financing. We show that if bank regulation is to raise the marginal funding cost for banks, these financial intermediaries transfer most of the incremental cost to their borrowers. Hence, risky firms switch to bond-financing due to the raised loan rate. Although financial stability improves, the average productivity declines. The impact of bank regulation on economic growth is unclear because more bond-financing leads to more inefficient liquidation. Overall, bank regulation benefit...

Two issues remain overlooked in empirical investigations of how labour share varies with technological innovation and market power. One is the risk of omitted variable bias that arises from failure to control for both innovation and market power at the same time. The second is the risk of confounding bias that arises from the possibility that innovation and market power affect each other and the labour share at the same time. I address both issues by adopting a simultaneous equations approach and using EU-KLEMS data from 1995 to 2019 on 31 OECD industries and 12 countries. The novel evidence I discover indicates that: (i) innovation always increases with market power, particularly when the latter increase from a high initial level; (ii) market power always increases with innovation, particularly when the latter is extended to include marketing and organisational innovation; (iii) market power is always more detrimental for labour share compared to innovation; and (iv) the combined effect of human capital and labour-market institutions reverses the adverse effect of innovation but it is insufficient to reverse the adverse effect of market power. These findings are robust to a wide range of sensitivity checks and indicate that the major driver of the decline in labour share is not technological innovation per se, but the extent of market power that enables firms to set real wages below the marginal product of labour.

This thesis addresses two main issues related to the housing market in China. It discovers: i) the key driving forces behind the movements of housing price and the evaluation of the model’s capacity in fitting the data. ii) try to identify whether the Chinese housing market can be explained better by using a model with collateral constraint. The Dynamic Stochastic General Equilibrium (DSGE) model including the housing sector and capturing some important features of the Chinese economy is employed to explore the above questions. Moreover, an Indirect Inference method is used to explore these issues in an empirical way. Estimation results show that the estimated model using Indirect Inference method can explain the data behaviour well. The estimated model shows that the capital demand shock plays a significant major role in explaining the housing price dynamic. In terms of the second issue, the Indirect Inference testing results show that the model with collateral constraint cannot pr...

We introduce government production of both output-augmenting and utility-enhancing public services into an exogenous growth model with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without government output, e.g., Vasilev (2009), when the economy features saddle-path stability, the presence of a second sector leads to equilibrium indeterminacy in the model. When public sector production adds to private sector output, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits." These results are in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for policy-making and welfare.

In this paper, we navigate the uncharted waters of the inflation targeting (IT) policy effectiveness in 19 middle-income nations (MINs), that have been implementing inflation targeting policies, to boost their output. The prerequisite for stable and high growth is to ensure prices do not become too volatile over the long term. Therefore, the central bank conducts specific policies to support the desired condition i.e. stable prices. We investigate whether IT policy has a forward-looking effect on improving income in 19 MINs. Our main contribution is by showing examination of IT policy as monetary instruments in supporting stable and high growth in MINs. Thus, we assess whether the IT policy played a significant role in inducing GDP per capita improvement in a forward-looking analysis. We emphasize on estimating the selection of unconstrained variables by utilizing the Bayesian framework. To the best of our knowledge, our approach is the pioneer of examining the forwardlooking effect of IT on MINs who implemented the IT policy. We find that the IT policy has no prominent role in improving the GDP per capita of the 19 MINs. These results are further confirmed by performing robustness checks with different prior specifications.

After the 2001 financial crises, in a new macroecon omic environment with low inflation, Turkish banks increased loans in order to maintain profitability and made efforts to operate efficiently to support their sustainable growth. I n this context, this study evaluates dynamic efficiencies and is monitoring stability patterns f or Turkish banks, between the periods of December 2003 - March 2009 in a quarterly basis. A two-stage analysis is performed on the financial ratios of largest Turkish banks which con trol vast majority of the market by total assets. Firstly, in order to deal with the proper v ariables to measure financial performance, the objective importance weights of the pre-selecte d financial ratios are determined via Shannon's "entropy" measure. With these relative we ights, a performance index of the sector during the analysis period is calculated and presen ted. After choosing the most important ratios as input and output variables, we evaluate t he rel...

I develop a New Keynesian model with preferences over safe assets (POSA) calibrated using evidence on the wedge between household discount rates and market interest rates. POSA attenuate intertemporal consumption smoothing and thus the household’s responsiveness to future interest rates, the more so the more distant in time they are located, and imply a consumption wealth effect. Therefore, POSA substantially lower the macroeconomic effect of forward guidance policies. By contrast, POSA does not substantially change the effect of the standard shocks of Smets/Wouters (2007) type DSGE models. The results carry over to a model with Iacoviello (2005,2014)-type collateral constraints. Such constraints in themselves tend to strongly amplify the effect of forward guidance.

In this paper, I investigate the effects of alternative risk aversion formulations on business cycle properties of an otherwise standard real business cycle economy. I first report on the implications of different risk aversion formulations on impulse response functions of real variables, and show that when risk aversion coefficient co-moves counter-cyclically, responses of real variables vary sizeably due to additional wedges both in the intratemporal and the intertemporal margin. Next, I show that formulating the risk aversion coefficient as random walk instead of a deep structural parameter generates better fit with observed volatilities of real variables. Finally, I report that modelling risk aversion coefficient in an endogenously-driven counter-cyclical way improves match with data on real variable correlations.

Since 2012, global trade growth has slowed significantly relative to both its historical trend and output growth. There is some debate around whether this slowdown is due to cyclical or structural factors. The answer to this question has important implications for future trade growth. We develop a dynamic quantitative two-country model in which trade responds gradually to changes in trade costs. We capture cyclical and structural factors with movements in productivity and trade costs. We use Bayesian estimation to match the model with time series from the data. We then compute the contributions of cyclical and structural factors on the slowdown. Our model also offers insights on how changes in productivity and trade costs affect trade and output in different ways.

Tato prace analyzuje chovani ceske ekonomiky v době dramatických ekonomických udalosti, ktere zapocaly v roce 2008. Analýza je provedena za využiti dynamickeho stochastickeho modelu vseobecne rovnovahy (DSGE). Model je identifikovan na realných historických datech. Analýza chovani modelu je provedena použitim metod rekurzivni estimace parametrů, impulznich odezev a sokove dekompozice. Model je posleze využit k vytvořeni podminěných předpovědi dalsiho vývoje ceske ekonomiky.