A Simple DGE Model for Inflation Targeting, Issues 2007-2197
International Monetary Fund, Middle East and Central Asia Department, Aug 1, 2007 - Inflation (Finance) - 96 pages
The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.
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Balassa-Samuelson effect behavior business cycle business cycle fluctuations calibration capture central banks changes channel consumption growth core model core projection correlation crisis period deep habit denominated assets DGE models disinflation domestic dynamics elasticity emerging market economies estimated exchange rate appreciation export sector first-order condition foreign interest rate Government consumption headline inflation household inflation expectations inflation rates inflation shocks inflation target intertemporal log-growth long-run long-term medium-term model design model properties model's steady monetary policy transmission monetary transmission nominal exchange rate nominal interest rate non-tradable inflation non-tradable sector parameterized permanent shocks Phillips curve policy analysis Policy reaction private consumption projection models real exchange rate real interest rates real marginal costs real variables relative price risk premium Shock Own computations standard deviations steady-state stochastic substitution target shocks technology shifter temporary shocks terms of trade tradable and non-tradable tradable inflation tradable sector transmission mechanism Turkey Turkish data Turkish economy