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Author: Wondemhunegn Ezezew Melesse Publisher: ISBN: Category : Languages : en Pages : 35
Book Description
In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
Author: Wondemhunegn Ezezew Melesse Publisher: ISBN: Category : Languages : en Pages : 35
Book Description
In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
Author: Mr.Sébastien Walker Publisher: International Monetary Fund ISBN: 1475595778 Category : Business & Economics Languages : en Pages : 52
Book Description
This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model with a financial accelerator which captures key features of low-income countries (LICs). The predominance of supply shocks in LICs poses distinct challenges for policymakers, given the negative correlation between inflation and the output gap in the case of supply shocks. Our results suggest that: (1) in the face of a supply-side shock, the most desirable interest rate rule involves simply targeting current inflation and smoothing the policy interest rate; and (2) ignoring financial frictions when evaluating policy rules can be particularly problematic in LICs, where financial frictions loom especially large.
Author: Gan-Ochir Doojav Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
Examining the business cycle and the monetary transmission mechanism in a small open economy based on the macroeconomic models is vital for successfully implementing forward-looking and counter-cyclical macroeconomic policies. In the context, this thesis focuses on the importance of various modelling implications (i.e., frictions and shocks) in developing empirically viable small open economy dynamic stochastic general equilibrium (DSGE) models. The thesis comprises three self-contained chapters on formulating, estimating and evaluating the DSGE models using Bayesian methods and data for Australia and the United States (US) (or G7 for Chapter 2), as well as a general thesis introduction and conclusion. Chapter 2 investigates the quantitative role of a cost channel of monetary policy and an uncovered interest rate parity (UIP) modification in an estimated small open economy DSGE model. For this purpose, a small open economy New Keynesian DSGE model developed by Justiniano and Preston (2010a) (i.e., benchmark model for the thesis) is augmented to incorporate the cost channel and the UIP modification based on a forward premium puzzle. The empirical analysis shows that introducing the cost channel and the UIP modification into the estimated model improves its ability to fit business cycle properties of key macroeconomic variables and to account for the empirical evidence on the monetary transmission mechanism. Chapter 3 assesses the importance of news shocks in a small open economy DSGE model for analysing business cycle properties of macroeconomic aggregates, including labour market variables. To this end, the model in Chapter 2 is enlarged in Chapter 3 to include (i) the theory of invoulntary unemployment proposed by Galí (2011), (ii) an endogenous preference shifter, similar to that used by Galí et al. (2011), and (iii) both news (anticipated) and unanticipated components in each structural shock. The results show that the estimated model is able to qualitatively replicate the existing VAR-based results (e.g., Kosaka 2013, Kamber et al. 2014 and Theodoridis and Zanetti 2014) on news driven business cycles, and the presence of news shocks has the potential to improve the model fit. Another important finding is that news shocks have been the main drivers of the Australian business cycle in the inflation-targeting period. Chapter 4 examines the significance of financial frictions and shocks in a small open economy DSGE model for explaining macroeconomic fluctuations. In doing so, Chapter 4 has further extended the model in Chapter 3 to a rich DSGE model in the two-country setting with involuntary unemployment, financial frictions and shocks. The main results include (i) the presence of financial accelerator improves the model fit, (ii) the financial accelerator amplifies and propagates the effects of monetary policy shocks on output, but dampens the effects of technology and labour supply shocks in Australia and the US, and (iii) financial shocks (i.e., shocks to the credit spread) are important for explaining investment and output fluctuations in both countries. Finally, this thesis provides implications for designing macroeconomic policies and building empirically viable open economy DSGE models to analyse the transmission mechanism of monetary policy and the business cycle.
Author: Lawrence J. Christiano Publisher: ISBN: Category : Languages : en Pages : 73
Book Description
The current financial crisis has made it abundantly clear that business cycle modeling can no longer abstract from financial factors. It is also clear that the current standard approach of modeling labor markets without explicit unemployment has its limitations. We extend what is becoming the standard new Keynesian model in three dimensions. First, we incorporate financial frictions in the accumulation and management of capital. Second, we model the labor market using a search and matching framework. Third, we extend the model into a small open economy setting. Finally, we estimate the model using Bayesian techniques with Swedish data. Our main results are as follows: (1) The financial shock to entrepreneurial wealth is pivotal for explaining business cycle fluctuations. It accounts for two-thirds of the variance in investment and a quarter of the variance in GDP. (2) The marginal efficiency of investment shock has very limited importance. The reason for this is that we match financial market data. (3) In contrast to the existing literature on estimated DSGE models, our model does not need any wage markup shocks or similar shocks with low autocorrelation to match the data. Furthermore, the low-frequency labor preference shock that we do allow is not important in explaining GDP. (4) The tightness of the labor market is unimportant for the cost of adjusting the workforce. In other words, there are costs of hiring but no significant costs of vacancy postings per se.
Author: Jasmin Sin Publisher: International Monetary Fund ISBN: 1498366295 Category : Business & Economics Languages : en Pages : 34
Book Description
This paper studies the fiscal multiplier using a small-open-economy DSGE model enriched with financial frictions. It shows that the multiplier is large when frictions are present in domestic and international financial markets. The reason is that in the model government bonds are more liquid than private financial assets and that entrepreneurs face liquidity constraints. A bond-financed fiscal expansion eases these constraints and stimulates investment and hence growth. This mechanism, however, breaks down under the assumption of perfect international capital mobility, suggesting that conventional models which ignore the presence of frictions in international capital markets tend to underestimate the fiscal multiplier.
Author: Mr.Jaromir Benes Publisher: International Monetary Fund ISBN: 1475524986 Category : Business & Economics Languages : en Pages : 59
Book Description
This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.
Author: Rossana Merola Publisher: ISBN: Category : Languages : en Pages : 55
Book Description
Episodes of crises that have recently plagued many emerging market economies have lead to a wide-spread questioning of the two traditional generations of models of currency crises. Distressed banking system and adverse credit-markets conditions have been pointed as sources of serious macroeconomics contractions, so introducing these imperfections into standard economic models can help to explain the more recent crises. This paper introduces financial frictions à la Bernanke Gertler and Gilchrist in a two-sector small open economy, suited to analyze an emerging country. The model is estimated on simulated data applying both Bayesian techniques and maximum likelihood method and comparing the results under the two di¤erent estimation procedures. First, I analyze the inĵuence of the prior on the estimation outcomes. Results seems to conijrm that one of the main advantages of Bayesian approach is the ability of providing a framework for evaluating fundamentally mis-specified models. Second, I test the sensitivity of estimation outcomes to the sample size, showing how, for large samples, results under Bayesian estimation converges asymptotically to those obtained applying maximum likelihood. A further extension would be to perform the estimation on historical data for an emerging economy that have recently experienced a financial crisis.
Author: Wondemhunegn Ezezew Melesse
Author: Wondemhunegn Ezezew Melesse
Author: Mr.Sébastien Walker
Author: Gan-Ochir Doojav
Author: Lawrence J. Christiano
Author: Jasmin Sin
Author: Mr.Jaromir Benes
Author: Rossana Merola
Author: Uluc Aysun
Author: Yuliya Rychalovská
Author: Rossana Merola