Transcript International Growth Rule Model: New Approach to the Foreign

An Estimated Baseline Model
of the Czech Open Economy
Karel Musil
CNB, MU
Econometric Day
28th November 2008
Basic Aim
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explore dynamic behavior of the Czech
economy and monetary policy implications
with using of Dynamic Stochastic General
Equilibrium model
New Keynesian DSGE approach
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microec. foundations, optimizing behavior, rigidities, …
New Open Economy Macroeconomics
Czech economy
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Inflation targeting
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Adjusted Two-Country Model (A2C)
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DSGE model of two economies
4 representative agents
Original 2C model: Lubik, Schorfheide (2005)
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adjusted
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extended
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preferences and technologies
size of modeled economies
tradable (TR) and non-tradable (NONTR) sectors
risk premium in UIP condition
All parameters estimated (not calibrated)
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A2C: Representative Household
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Maximization of utility function with respect to
budget constraint
First order conditions (FOC)
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intratemporal rate marginal of substitution between
consumption and leisure
Intertemporal Euler equation
UIP condition with risk premium
Rigidity in consumption
Consumption bundle: 3 types of goods
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A2C: Connection to Abroad
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Terms of trade
Overall CPI inflation
Law of one price gap
Real exchange rate
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relative prices of tradable and non-tradable goods
Balassa-Samuelson effect
International financial market
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UIP condition
international risk sharing condition
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A2C: Representative Firms
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Monopolistic competition in TR and NONTR
Production function with only labor and
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FOC for output decision
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country specific technologies for TR and NONTR
world long-run technological progress
marginal costs development for TR and NONTR sector
FOC for price behavior
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price rigidity (Calvo)
3 NK Phillips Curves for domestic TR, NONTR, imports
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A2C: Central Monetary Authority
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Taylor rule in inflation targeting regime
Growth rule for output
Modified Taylor rule
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change in nominal interest rate depends on
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last period interest rate
deviation of inflation from inflation target
output gap
monetary policy shock
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A2C: Market Clearing Condition
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Domestic output influenced by foreign output
Equilibrium conditions
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NONTR sector
TR sector: partly exported
imported goods
Domestic goods market equilibrium
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degree of openness of both economies
share of non-tradable consumption
relative prices of TR and NONTR, terms of trade
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A2C: Foreign Economy
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Similar (or reversed) behavior of agents
Differences
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Agents
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only TR sector
different size of foreign economy
own technological shocks
households
producers
central bank
Market clearing condition
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A2C: System of Model Equations
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43 equations and identities in 5 blocks
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domestic economy behavior
connection between domestic and foreign economies
foreign economy behavior
identities for inflation and relative prices
exogenous processes for development of domestic and
foreign technologies
24 parameters for estimation
9 shocks
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Solving and Estimation
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Linearized and stationarized system rewritten
into Linear Rational Expectations form
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Transformed to state-space representation
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Bayesian approach using prior information
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Dynare and Iris
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Data
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Czech economy and effective Euroarea
Quarterly, from I. Q 1999 to II. Q 2008
Deviation of level from balanced level
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domestic and Euroarea real GDP
domestic CPI (deviation from inflation target)
level of prices in the domestic tradable sector
level of imported prices
non-annualized domestic nominal 3M interest rate
nominal exchange rate CZK/EUR
Euroarea CPI
non-annualized nominal foreign 3M EONIA
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Results: A2C Estimated Parameters
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degree of openness (share of imports to GDP)
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share of non-tradable consumption 52%
relatively high persistence in consumption behavior
almost unit elasticity in labor supply
elasticity of substitution between
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domestic economy 72%
foreign economy 2%
domestic TR and NONTR 0.03
domestic TR and foreign TR (imports) 0.70
average duration of price contracts (in quarters)
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domestic TR 1.6, domestic NONTR 1.3, domestic imports 2.4
foreign TR 4.4, foreign imports 3.7
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Results: A2C Estimated Parameters
… continuing
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Modified Taylor rule
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domestic central bank
irt  0.92 irt  1  (1  0.92)(1.26 πt  0.45 gdpt )  εt
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foreign central bank
irf , t  0.83 irf , t  1  (1  0.83)(1.34 πf , t  0.31 gdpf , t )  εf , t
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persistence for specific country shock (and for both sectors in
the domestic economy) 0.56 – 0.61
persistence for long-run world technology progress 0.61
relatively low standard deviation for
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monetary policy shock in domestic and foreign economy
world technology progress
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Results: Analysis of Behavior
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Domestic technology changes
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Monetary policy shock
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short lived impact
World long-run technology changes
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domestic: long-lasting impacts
foreign: long-run destabilization of domestic economy
Risk premium shock
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long-run effect on domestic output
Influence on foreign output, but very small
only theoretical
Rest shocks: common characteristics
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Foreign Monetary Policy Shock IRFs
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Conclusion
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NK DSGE model with NOEM approach
A2C is tailored to the Czech condition
Foreign sector is a “natural constraint“
Influence of domestic economy to abroad
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some synergic effects
effect of a foreign sector “stabilizer“
Very small mutual interdependence
Appropriate approximation of behavior of the
Czech economy
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Thanks for your attention.
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