Munich Personal RePEc Archive

A Structural Macro-Econometric Model of the Maltese Economy

Grech, Aaron George and Grech, Owen and Micallef, Brian and Rapa, Noel and Gatt, William (2013): A Structural Macro-Econometric Model of the Maltese Economy.

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This paper presents a structural macro-econometric model of the Maltese economy developed at the Modelling & Research Office of the Central Bank of Malta during 2012. This model is small-scale, consisting of 19 behavioural equations (estimated on quarterly data from 2000 to 2011) and 130 identities. There are 33 exogenous variables, mostly economic variables for trading partners, commodity prices, demographic developments and fiscal variables. The model is built around the neoclassical synthesis, with sluggish adjustment of wages and prices in the short run and also some inertia of real variables in response to shocks. Economic agents are assumed to have adaptive expectations. There are four blocks in the model. The supply block is composed of a Cobb-Douglas production function and a demand for labour equation. The aggregate demand block has six behavioural equations explaining the components of real GDP. The wage/price block includes four equations for the aggregate demand components of real GDP, a private wage function and a house price equation. The financial block models consumer credit and mortgage credit, with three other equations determining the pass-through of the policy rate to lending rates.

This paper also presents the economic impact of four simulated shocks: an increase in the policy rate, a rise in oil prices, an appreciation of the euro against the US dollar and higher world demand. The simulations confirm that the impact of monetary policy is weak in Malta while that of a change in foreign demand is quite strong. The exposure of the Maltese economy to shocks in oil prices and in the value of the US dollar also appears to be relatively significant.

This paper is meant to constitute an intermediate stage in the structural model’s development. In future there will be further refinements, such as an enhanced integration of the supply side, the inclusion of an endogenous fiscal block, a more detailed financial block and further sectorial disaggregation.

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