Haider, Adnan and Khan, Safdar Ullah (2008): A Small Open Economy DSGE Model for Pakistan.
Download (572kB) | Preview
This paper estimates a small open economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan using Bayesian simulation approach. Model setup is based on new Keynesian framework, characterized by nominal rigidity in prices with habit formation in household’s consumption. The core objective is to study whether an estimated small open economy DSGE model provides a realistic behavior about the structure Pakistan economy with fully articulated description of the monetary policy transmission mechanism vis-à-vis domestic firm’s price setting behavior. To do so, we analyze the impulse responses of key macro variables; domestic inflation, imported inflation, output, consumption, interest rate, exchange rate, term of trade to different structural/exogenous shocks. From several interesting results, few are; (a) high inflation in Pakistan do not hit domestic consumption significantly; (b) Central bank of Pakistan responds to high inflation by increasing the policy rate by 100 to 200 bps; (c) exchange rate appreciates in both the cases of high domestic and imported inflation; (d) tight monetary policy stance helps to curb domestic inflation as well as imported inflation but appreciates exchange rate significantly (f) pass through of exchange rate to domestic inflation is very low; finally parameter value of domestic price stickiness shows that around 24 percent domestic firms do not re-optimize their prices which implies averaged price contract is about two quarters.
|Item Type:||MPRA Paper|
|Original Title:||A Small Open Economy DSGE Model for Pakistan|
|Keywords:||New-Keynesian economics; open economy DSGE models; nominal rigidities; monetary policy transmission mechanism; Bayesian Approach|
|Subjects:||F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation: Models and Applications
|Depositing User:||Adnan Haider Adnan|
|Date Deposited:||24. Jan 2009 08:50|
|Last Modified:||12. Feb 2013 14:07|
Adolfson, M., S. Laséen, J. Linde, and M. Villani (2008). “Evaluating an estimated new Keynesian small open economy model”, Journal of Economic Dynamics and Control, 32: 2690–2721
Adolfson, M., S. Laséen, J. Linde, and M. Villani (2007a). "RAMSES: a new general equilibrium model for monetary policy analysis", Risksbank, Economic Review, Vol. 2.
Adolfson, M., S. Laséen, J. Linde, and M. Villani (2007b). "Bayesian estimation of an open economy DSGE model with incomplete pass-through", Journal of International Economics, 72: 481-511
Altug, S. (1989). “Time-to-Build and Aggregate Fluctuations: Some New Evidence”, International Economic Review, 30: 889–920
An, S., and F. Schorfheide (2007). “Bayesian analysis of DSGE models”, Econometric Reviews, 26: 113-172
Benes, J., T. Hledik, M. Kumhof and D. Vavra (2005). "An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs", Czech National Bank, Research Department, Working Papers 2005/12
Bosch, M. (2007). “Job Creation and Job Destruction in the Presence of Informal Labour Markets”, Mimeo, London School of Economics.
Brubakk, L, T. Anders, J. Maih, K. Olsen and M. Østnor (2006). "Finding NEMO: Documentation of the Norwegian economy model", Norwegian Central Bank, Staff Memo No. 2006-6.
Bukhari, S. A. H. A. S. and S. U. Khan (2008). “Estimating Output Gap for Pakistan Economy: Structural and Statistical Approaches”, State Bank of Pakistan, Working Paper Series No. 24
Buncic, D. and M. Melecky (2008). "An Estimated New Keynesian Policy Model for Australia", The Economic Record, The Economic Society of Australia, 84: 1-16
Calvo, G. A. (1983). “Staggered price setting in a utility-maximizing framework”, Journal of Monetary Economics, 12: 383–398
Canova, F. (2002). “Validating two monetary models via VARs”, CEPR working 3442
Canova, F. (2007). “Methods for applied macroeconomic research”, Princeton University Press.
Castillo, P., C. Montoro and V. Tuesta (2008). "MEGA-D: Modelo de equilibrio general aggregado con dolarización parcial para la economía peruana", Central Reserve Bank of Peru, forthcoming.
Chisti, U. S. A. Hasan, and S. F. Mahmud (1992), “Macroeconometric modeling and Pakistan’s Economy: A vector autoregression approach”, Journal of Development Economics, 38: 353-370
Christiano, L., and M. Eichenbaum (1992). “Current Real-Business Cycle Theories and Aggregate Labor-Market Fluctuations”, American Economic Review, 82: 430–45
Christiano, L. J., M. Eichenbaum, and C. L. Evans (1997). “Sticky price and limited participation models of money: A comparison”, European Economic Review, 41: 1201-1249
Christiano, L. J., M. Eichenbaum, and C. L. Evans (1998). “Monetary policy shocks: What have we learned and to what end?”, In Taylor, J. B. and M. Woodford (Eds.), Handbook of Macroeconomics. Amsterdam, North-Holland.
Christiano, L., M. Eichembaum and C. Evans (2005). “Nominal rigidities and the dynamic effects to a shock of monetary policy”, Journal of Political Economy, 113: 1-45
Christoffel, K., Günter C. and Anders W. (2008). “NAWM: A Micro-Founded Open-Economy Model for Forecasting and Policy Analysis”, ECB Working Paper No. 944 / October 2008.
Clarida, R. and M. Gertler, (1997). “How the Bundesbank conducts monetary policy”, Memo, Bundesbank.
Clarida, R., J. Gali and M. Gertler, (1998). “Monetary policy rules in practice: Some international evidence”, European Economic Review, 42: 1033-1067
Clarida, R., J. Gali and M. Gertler, (1999). “The science of monetary policy: A new Keynesian perspective”, Journal of Economic Literature, 37: 1661-1707
Clarida, R., J. Gali and M. Gertler, (2000), “Monetary policy rules and macroeconomic stability: Evidence and some theory”, Quarterly Journal of Economics, 115: 147-180
Colander, D., P. Howwit, A. Kirman, A. Leijonhufvud and P. Mehrling (2008). "Beyond DSGE models: toward an empirically based macroeconomics", American Economic Review: Papers and Proceedings, 98: 236-240
Copaciu, M. F. Neagu , H. Braun-Erdei (2005). “Survey Evidence on Price Setting Patterns of Romanian Firms”, Mimeo, National Bank of Romania
da Silveira, M. A. C. (2006). “A Small Open Economy as a Limit Case of a Two-Country New Keynesian DSGE Model: A Bayesian Estimation with Brazilian Data”, Instituto de Pesquisa Econômica Aplicada, Discussion Paper no 1252a
DeJong, D., B. Ingram, and C. Whiteman (2000). “A Bayesian Approach to Dynamic Macroeconomics”, Journal of Econometrics, 98: 201–223
Dib, A., M. Gammoudi, and K. Moran (2005). “Forecasting with the New-Keynesian Model: An Experiment with Canadian Data”, manuscript, Bank of Canada
Dib, A. & M. Gammoudi and K. Moran (2008). “Forecasting Canadian time series with the New Keynesian model", Canadian Journal of Economics, Canadian Economics Association, 41: 138-165
DiCecio, R. and Edward Nelson, (2007). "An estimated DSGE model for the United Kingdom", Review, Federal Reserve Bank of St. Louis, July Issue, 215-232
Diebold, F. X. (1998). “The Past, Present, and Future of Macroeconomic Forecasting”, Journal of Economic Perspectives, 12: 175–192
Dixit, A., and J. Stiglitz (1977). “Monopolistic Competition and Optimum Product Diversity”, American Economic Review, 67: 297–30
Eichenbaum, M. and C. Evans (1995). “Some empirical evidence on the effects of shocks to monetary policy on exchange rates”, Quarterly Journal of Economics, 110: 975– 1010
Erceg, C., L. Guerrieri and C. Gust (2006). "SIGMA: a new open economy model for policy analysis", International Journal of Central Banking, 2: 111-144
Fama, E. (1984). “Forward and spot exchange rates”, Journal of Monetary Economics, 14: 319– 338
Faust, J. and J. Rogers (2003). “Monetary policy’s role in exchange rate behavior”, Journal of Monetary Economics, 50: 1403– 1424
Favero, C. (2001). “Applied macroeconometrics”, Oxford University press.
Froot, K. and J. Frankel (1989). “Forward discount bias: is it an exchange risk premium”, Quarterly Journal of Economics, 104: 139– 161
Gali, J. (2008). “Monetary Policy, Inflation and the Business Cycle: An introduction to the New Keynesian Framework”, Princeton University Press
Gali, J. and M. Gertler, (1999). “Inflation dynamics: A structural econometric analysis”, Journal of Monetary Economics, 44: 195-222
Gali, J., and M. Gertler (2007). "Macroeconomic modeling for monetary policy evaluation", Journal of Economic Perspectives, 21, Fall Issue
Gali, J., T. Monacelli (2005). “Monetary Policy and Exchange Rate Volatility in a Small Open Economy” Review of Economic Studies, 72: 707-734
Gelman, A., J. B. Carlin, H. S. Stern and D. B. Rubin (2006). “Bayesian Data Analysis”, Second Edition, Text in Statistical Science, Chapman and Hall
Geweke, J. (1995). “Monte Carlo Simulation and Numerical Integration”, Federal Reserve Bank of Mineapolis, Research Department Staff Report 192.
Geweke, J. (1999). “Using Simulation Methods for Bayesian Econometric Models: Inference, Development and Communication,” Econometric Reviews, 18: 1–73
Goodfriend, M. (2007). "How the world achieved consensus on monetary policy", Journal of Economic Perspectives, 21, Fall Issue
Goodfriend, M. and R. King (1997). "The new neoclassical synthesis and the role of monetary policy", NBER Macroeconomics Annual, Vol. 1997.
Gouvea, S., A. Minella, R. Santos, and N. Souza-Sobrinhoy (2008). “Samba: Stochastic Analytical Model with a Bayesian Approach”, Workshop Paper, Central Bank Workshop on Macroeconomic Modeling 2008, Banco de la República, Colombia.
Griffolio, T. M. (2007). “DYNARE user manual: An introduction to the solution and estimation of DSGE models”, Unpublished Manuscript.
Hamann, F., J. Pérez and D. Rodríguez (2006). “Bringing a DSGE model into policy environment in Colombia”, Conference Paper, Central Bank of Chile
Harrison, R., K. Nikolov, M. Quinn, G. Ramsay, A. Scott and R. Thomas (2005). “Bank of England Quarterly Model”, Bank of England.
Haque, N. U. & A. M. Husain, & P. J. Montiel (1994). "An empirical "dependent economy" model for Pakistan", World Development, 22: 1585-1597
Hastings, W. (1970). “Monte Carlo sampling methods using Markov Chains and their applications” Biometrika, 57: 97–109
Ireland, P. N. (2000a). “Sticky-Price Models of the Business Cycle: Specification and Stability”, NBER Working Paper 7511
Ireland, P. N. (2000b). “Sticky-Price Models of the Business Cycle: Specification and Stability,” NBER Working Paper 7511.
Ireland, P. N. (2004). “Technology Shocks in the New Keynesian Model”, NBER Working Paper No. W10309
Justiniano, A., B. Preston (2004). “Small open economy DSGE models: specification, estimation and model fit”, Manuscript, Columbia University.
Justiniano, A., B. Preston (2005). “Can structural small open economy models account for the influence of foreign shocks”, Manuscript, Columbia University.
Kemal, A. R. and M. F. Arby (2004). “Quarterization of annual GDP of Pakistan”, Statistical paper series 05, Pakistan Institute of Development Economics, Islamabad
Keynes, J. M. (1936). “The General Theory of Employment, Interest and Money”, Harcourt Brace Jovanovich.
Kim, J. (2000). “Constructing and Estimating a Realistic Optimizing Model of Monetary,” Journal of Monetary Economics, 45: 329–359
Klein, P (2000). “Using the generalized Schur form to solve a multivariate linear rational expectations model”, Journal of Economic Dynamics & Control, 24: 1405-1423
Kolasa, M. (2008). “Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model”, National Bank of Poland, Working Paper No. 49
Koop, G., D. J. Poirier and J. L. Tobias (2007). “Bayesian Econometric Methods”, Cambridge University Press
Kwapil, C., J. Baumgartner and J. Scharler (2005). “The Price-Setting Behavior of Austrian Firms Some Survey Evidence”, European Central Bank, Working Paper Series No. 464
Kydland, F. E., and E. C. Prescott (1982). “Time to build and aggregate fluctuations”, Econometrica, 50: 1345-1370
Kydland, F. E. and E. C. Prescott (1996). "The computational experiment: an econometric tool", Journal of Economic Perspectives, 10, Winter Issue.
Lancaster, T. (2004). “An introduction to modern Bayesian econometrics”, Blackwell publishing.
Laforte, J. P. (2004). “Comparing Monetary Policy Rules in an Estimated General Equilibrium Model of the U.S. Economy”, Memo, Federal Reserve Board of Governors.
Landon-Lane, J. (1998). “Bayesian Comparison of Dynamic Macroeconomic Models,” Ph.D. Dissertation, University of Minnesota
Laxton, D. (2008). "Getting to know the Global Economy Model and its philosophy", IMF Staff Papers, 55: 213-242 Leeper, E., and C. Sims (1994). “Toward a Modern Macroeconomic Model Usable for Policy Analysis” in Stanley Fischer and Julio Rotemberg (eds) NBER Macroeconomics Annual, MIT Press, Cambridge, MA.
Liu, P. (2006). “A Small New Keynesian Model of the New Zealand economy”, Reserve Bank of New Zealand, Discussion Paper Series, No. 03/06
Lubik, T., Schorfheide, F. (2005). “A Bayesian look at new open economy macroeconomics”. In: Gertler, M., Rogoff, K. (Eds.), NBER Macroeconomics Annual, 313– 336
Lucas, J. R. (1976). “Econometric policy evaluation: a critique”, in K. Brunner and A Meltzer, The Phillips curve and labor markets, North Holland.
Lucas, J. R. and Sargent, T. J. (1979). “After Keynesian Macroeconomics", Federal Reserve Bank of Minneapolis, Quarterly Review, 3: 1-16
Malik, W. S. and A. M. Ahmed (2007). “The Taylor Rule and the Macroeconomic Performance in Pakistan, Pakistan Institute of Development Economics, Working Paper Series No. 2007:34, Islamabad, Pakistan
Mankiw, G. N. (1985). “Small menu costs and large business cycles: A macroeconomic model of monopoly”, Quarterly Journal of Economics, 100: 529-539
Mankiw, G. N. (1989). “Real business cycle: A new Keynesian perspective”, Journal of Economic Perspectives, 3: 79-90
Mankiw, G. N. (1990). “A quick refresher course in macroeconomics”, Journal of Economic Literature, 28: 1645-1660
Mankiw, G. N. and D. Romer, (1990). “New Keynesian Economics”, MIT, Press, Boston.
Mankiw, G. N. (2006). “The macroeconomist as scientist and engineer", Journal of Economic Perspectives, fall issue, 20: 29-46l
McCarthy, F. D. and L. Taylor (1980). "Macro Food Policy Planning: a General Equilibrium Model for Pakistan", Review of Economics and Statistics, 62: 107-121
McGrattan, E. (1994). “The Macroeconomic Effects of Distortionary Taxation,” Journal of Monetary Economics, 33: 573–601
Medina, J. P. and C. Soto. (2006). “Model for Analysis and Simulations: A Small Open Economy DSGE for Chile”, Conference Paper, Central Bank of Chile
Medina, J. and C. Soto (2007). "The Chilean business cycle through the lens of a stochastic general equilibrium model", Central Bank of Chile, Working Papers No. 457
Monacelli, T. (2003). “Monetary Policy in a Low Pass-through Environment”, European Central Bank, Working Paper No. 227
Murchison, S. and A. Rennison (2006). "ToTEM: The Bank of Canada’s new quarterly projection model", Bank of Canada, Technical Report No. 97.
Naqvi S. N. H., A. M. Ahmed and et al. (1983). “The PIDE Macroeconometric Model of Pakistan's Economy”, Pakistan Institute of Development Economics, Islamabad, Pakistan
Naqvi S. N. H., A. M. Ahmed (1986). “Preliminary Revised P.I.D.E. Macro-econometric Model of Pakistan's Economy”, Pakistan Institute of Development Economics, Islamabad, Pakistan.
Negro, M. D., F. Schorfheide, F. Smets and R. Wouters (2005). "On the fit and forecasting performance of New-Keynesian models", European Central Bank, Working Paper Series 491
Obstfeld, M. and K. Rogoff (2002). "New directions for stochastic open economy models", Journal of International Economics, 50, 117-153
Omer, M. and O. F. Saqib (2008). “Monetary Targeting in Pakistan: A Skeptical Note”, State Bank of Pakistan, Working Paper Series No. 25
Onatski, A., and N. Williams (2004). “Empirical and Policy Performance of a Forward-Looking Monetary Model”, mimeo, Princeton University.
Otrok, C. (2001). “On Measuring the Welfare Cost of Business Cycles”, Journal of Monetary Economics, 47: 61–92
Pasha, H. A., M. A. Hasan, A. G. Pasha, Z. H. Ismail, A. Rasheed, M. A. Iqbal, R. Ghaus, A. R. Khan, N. Ahmed, N. Bano and N. Hanif (1995), “Integrated Social Policy and Macro-Economic Planning Model for Pakistan”, Social Policy and Development Center, Karachi, Pakistan, Research Report, No. 7
Peiris, S. J. and M. Saxegaard (2007). “An Estimated DSGE Model for Monetary Policy Analysis in Low-Income Countries”, IMF Working Paper No. 07/282
Pesenti, E. (2008). "The Global Economy Model: theoretical framework", IMF Staff Papers, 55, 243-284
Prescott, E. (1986). “Theory ahead of business cycle measurement”, Federal Reserve Bank of Minneapolis, Quarterly Review, Fall, 9-22
Ratto, M., W. Roeger, J. in 't Veld (2008). “QUEST III: An estimated open-economy DSGE model of the euro area with fiscal and monetary policy”, Economic Modeling, Forthcoming Issue
Ratto, M. (2007). “Analyzing DSGE models with Global Sensitivity Analysis”, Computational Economics, 31, 115 - 139
Romer, C. and D. Romer (1997), “Reducing inflation”, NBER and University of Chicago Press.
Romer, D. (1993). "The New Keynesian Synthesis", Journal of Economic Perspectives, American Economic Association, 7: 5-22
Romer, D. (2006). “Advanced Macroeconomics”. Third Edition, McGraw-Hill, New York.
Ruge-Murcia, F. (2003). “Methods to Estimate Dynamic Stochastic General Equilibrium Models”, Cahier 17-2003.
Sadeq, T. (2008). “Bayesian estimation of a DSGE model and optimal monetary policy for central Europe transition countries”, Memo, EPEE, Université d.Evry Val d.Essonne
Sargent, T. J., and N. Wallace (1975). “Rational expectations, the optimal monetary instrument, and the optimal money supply rule”, Journal of Political Economy, 83: 241-254.
Schmidtt-Grohé, S. and M. Uribe (2003). “Closing small open economy models”, Journal of International Economics, 61: 163-185
Schorfheide, F. (2000). “Loss Function Based Evaluation of DSGE Models”, Journal of Applied Econometrics, 15: 645–670
Siddiqui, R. and Z. Iqbal (1999). “Social Accounting Matrix of Pakistan for 1989-90”, PIDE, Islamabad, Research Report Series No. 171
Siddiqui, R. and Z. Iqbal (2001). “Tariff Reduction and Functional Income Distribution in Pakistan: A CGE Approach”, MIMAP Technical Paper Series, No. 10, PIDE, Islamabad, Pakistan
Siddiqui, R. and A. R. Kemal (2006). “Poverty-Reducing or Poverty-Inducing? A CGE-based Analysis of Foreign Capital Inflow in Pakistan”, PIDE Working Paper No. 2, PIDE, Islamabad, Pakistan
Sims, C. (1996). “Macroeconomics and Methodology”, Journal of Economic Perspectives, 10: 105–120
Sims, C. (2002). “Solving Linear Rational Expectations Models”, Computational Economics, 20: 1–20
Smets, F., and R. Wouters (2003). “Monetary Policy in an Estimated Stochastic Dynamic General Equilibrium Model of the Euro Area”, Journal of the European Economic Association, 1: 1123–1175
Taylor, J. B. (1980). “Aggregate dynamics and staggered contracts”, Journal of Political Economy, 88: l-23
Taylor, J. (1993). “Discretion versus Policy Rules in Practice”, Carnegie-Rochester Series on Public Policy, 39, 195– 214, North-Holland, Amsterdam
Taylor, J. B. (1998). “Staggered price and wage setting in macroeconomics”. In Taylor, J. B. and M. Woodford (Eds.), Handbook of Macroeconomics, Amsterdam, North-Holland.
Taylor, J. B. (1999). “Monetary policy rules, Chicago”, NBER and University of Chicago Press.
Tovar, E. C. (2005). "The mechanics of devaluations and the output response in a DSGE model: how relevant is the balance sheet effect?", Bank for International Settlements, BIS Working Papers No. 192.
Tovar, E. C. (2008). “DSGE models and central Banks”, Bank for International Settlements, BIS Working Paper No. 258.
Uhlig, H. (1999). “A Toolkit for Analyzing Nonlinear Dynamic Stochastic Models Easily” in Ramon Marimom and Adrian Scott, (Eds) Computational Methods for the Study of Dynamic Economies, Oxford University Press.
Woodford, M. (2004). “Interest and Prices: Foundations of a Theory of Monetary Policy”, Princeton University Press
Yun, T. (1996). “Nominal price rigidity, money supply endogeneity and business cycle”, Journal of Monetary Economics, 37: 345-370