Bringing a DSGE Model Into Policy Environment In Colombia
Descripción
Bringing a DSGE Model into Policy Environment in Colombia Franz Hamann, Julián Pérez and Diego Rodríguez Banco de la República de Colombia http://www.banrep.gov.co
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 1/42
Monetary Policy in Colombia ● Decision Making ● The Technology ● The Demand Stylized Facts The Model Parameterization
Monetary Policy in Colombia
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 2/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology
■
Policy decision is taken by the Board of Governors
● The Demand Stylized Facts The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology ● The Demand
■ ■
Policy decision is taken by the Board of Governors A single policy recommendation by the Deputy Governor
Stylized Facts The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology
■
● The Demand
■
Stylized Facts
■
Policy decision is taken by the Board of Governors A single policy recommendation by the Deputy Governor The policy recommendation uses a battery of technical tools
The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology
■
● The Demand
■
Stylized Facts
■
The Model
■
Policy decision is taken by the Board of Governors A single policy recommendation by the Deputy Governor The policy recommendation uses a battery of technical tools Board decides whether to follow or not the recommendation
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology
■
● The Demand
■
Stylized Facts
■
The Model
■
Parameterization
■
Policy decision is taken by the Board of Governors A single policy recommendation by the Deputy Governor The policy recommendation uses a battery of technical tools Board decides whether to follow or not the recommendation Governor communicates decision by Press Release
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
Decision Making
Monetary Policy in Colombia ● Decision Making ● The Technology
■
● The Demand
■
Stylized Facts
■
The Model
■
Parameterization
■
Effect and importance of shocks
■ Using the Model
Diego Rodríguez, September 22, 2006
Policy decision is taken by the Board of Governors A single policy recommendation by the Deputy Governor The policy recommendation uses a battery of technical tools Board decides whether to follow or not the recommendation Governor communicates decision by Press Release In a TV broadcasted presentation explains the decision (every quarter)
Bringing a DSGE into Policy Environment in Colombia - p. 3/42
The Technology
Monetary Policy in Colombia ● Decision Making ● The Technology ● The Demand
■
The process to produce a policy recommendation is similar to other Central Banks
Stylized Facts The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 4/42
The Technology
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts The Model
■
The process to produce a policy recommendation is similar to other Central Banks Quarterly policy and forecasting rounds (with monthly reviews)
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 4/42
The Technology
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
■
The process to produce a policy recommendation is similar to other Central Banks Quarterly policy and forecasting rounds (with monthly reviews) Tools for policy recommendation: ◆ Assessment of current/future economic conditions ◆ Conventional econometric techniques (VARS, SVARS, VECS, etc.); ◆ Subjective forecasting and sectoral experts; ◆ Core Macroeconomic Model (small and semi-structural); ◆ Other models: financial programming, balance of payments, financial stability, among others;
Bringing a DSGE into Policy Environment in Colombia - p. 4/42
The Technology
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization
■
Effect and importance of shocks Using the Model
■
Diego Rodríguez, September 22, 2006
The process to produce a policy recommendation is similar to other Central Banks Quarterly policy and forecasting rounds (with monthly reviews) Tools for policy recommendation: ◆ Assessment of current/future economic conditions ◆ Conventional econometric techniques (VARS, SVARS, VECS, etc.); ◆ Subjective forecasting and sectoral experts; ◆ Core Macroeconomic Model (small and semi-structural); ◆ Other models: financial programming, balance of payments, financial stability, among others; Judgment plays a prominent for the policy recommendation
Bringing a DSGE into Policy Environment in Colombia - p. 4/42
The Demand
Monetary Policy in Colombia ● Decision Making ● The Technology ● The Demand
■
There is a demand for improving the structure of the current Core Model
Stylized Facts The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
The Demand
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts The Model
■
There is a demand for improving the structure of the current Core Model The model does not consider important shocks: productivity, terms of trade shocks, remittances, etc.
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
The Demand
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization Effect and importance of shocks
■
There is a demand for improving the structure of the current Core Model The model does not consider important shocks: productivity, terms of trade shocks, remittances, etc. Need to understand the macroeconomic effects of these shocks...
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
The Demand
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization
■
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
■
There is a demand for improving the structure of the current Core Model The model does not consider important shocks: productivity, terms of trade shocks, remittances, etc. Need to understand the macroeconomic effects of these shocks... And their impact on monetary policy, given the mandate to control inflation.
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
The Demand
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization
■
Effect and importance of shocks Using the Model
■
■
Diego Rodríguez, September 22, 2006
There is a demand for improving the structure of the current Core Model The model does not consider important shocks: productivity, terms of trade shocks, remittances, etc. Need to understand the macroeconomic effects of these shocks... And their impact on monetary policy, given the mandate to control inflation. The result: need a structural model taylored to the Colombian Economy.
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
The Demand
Monetary Policy in Colombia
■
● Decision Making ● The Technology ● The Demand Stylized Facts
■
The Model Parameterization
■
Effect and importance of shocks Using the Model
■
■
■
Diego Rodríguez, September 22, 2006
There is a demand for improving the structure of the current Core Model The model does not consider important shocks: productivity, terms of trade shocks, remittances, etc. Need to understand the macroeconomic effects of these shocks... And their impact on monetary policy, given the mandate to control inflation. The result: need a structural model taylored to the Colombian Economy. Notice that there is also a lot of judgment here too!!
Bringing a DSGE into Policy Environment in Colombia - p. 5/42
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock
Stylized Facts
● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 6/42
Capital Inflows Facts
Monetary Policy in Colombia
■
In Colombia, capital inflows have been accompanied by:
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 7/42
Capital Inflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER
In Colombia, capital inflows have been accompanied by: a significant nominal and real exchange rate appreciation combined with low sovereign spreads,
● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 7/42
Capital Inflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock
■
In Colombia, capital inflows have been accompanied by: a significant nominal and real exchange rate appreciation combined with low sovereign spreads, a boom in total credit (to the private and/or the public sector) and domestic demand (consumption and investment),
● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 7/42
Capital Inflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices
■
● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER
■
In Colombia, capital inflows have been accompanied by: a significant nominal and real exchange rate appreciation combined with low sovereign spreads, a boom in total credit (to the private and/or the public sector) and domestic demand (consumption and investment), rapid growth in asset prices, not only stocks or financial assets, but also non-traded assets (like house prices) and
The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 7/42
Capital Inflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices
■
● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation
■
● Inflation and RER The Model
■
In Colombia, capital inflows have been accompanied by: a significant nominal and real exchange rate appreciation combined with low sovereign spreads, a boom in total credit (to the private and/or the public sector) and domestic demand (consumption and investment), rapid growth in asset prices, not only stocks or financial assets, but also non-traded assets (like house prices) and increased economic activity and employment.
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 7/42
Capital Outflows Facts
Monetary Policy in Colombia
■
In Colombia, capital outflows have been accompanied by:
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 8/42
Capital Outflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER
In Colombia, capital outflows have been accompanied by: a significant nominal and real exchange rate depreciation combined with high sovereign spreads,
● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 8/42
Capital Outflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation
■
In Colombia, capital outflows have been accompanied by: a significant nominal and real exchange rate depreciation combined with high sovereign spreads, a sharp reduction in total credit (to the private and/or the public sector) and domestic demand (consumption and investment),
● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 8/42
Capital Outflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices
■
● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model
■
In Colombia, capital outflows have been accompanied by: a significant nominal and real exchange rate depreciation combined with high sovereign spreads, a sharp reduction in total credit (to the private and/or the public sector) and domestic demand (consumption and investment), collapse in asset prices, not only stocks or financial assets, but also non-traded assets (like house prices) and
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 8/42
Capital Outflows Facts
Monetary Policy in Colombia
■
Stylized Facts
■
● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices
■
● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER
■
The Model Parameterization
■
In Colombia, capital outflows have been accompanied by: a significant nominal and real exchange rate depreciation combined with high sovereign spreads, a sharp reduction in total credit (to the private and/or the public sector) and domestic demand (consumption and investment), collapse in asset prices, not only stocks or financial assets, but also non-traded assets (like house prices) and reduced economic activity and employment.
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 8/42
Capital Flows and EMBI+
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 9/42
Capital Flows and RER
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 10/42
Capital Flows and Investment
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 11/42
Capital Flows and Asset Prices
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 12/42
Capital Flows and GDP
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 13/42
Remittances Shock
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 14/42
What about Inflation?
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts
■
Like many LACs, in Colombia inflation drop steadily during the nineties.
● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 15/42
What about Inflation?
Monetary Policy in Colombia
■
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices
■
Like many LACs, in Colombia inflation drop steadily during the nineties. In inflow periods nontradable inflation tends to increase relative to tradable.
● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 15/42
What about Inflation?
Monetary Policy in Colombia
■
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation
■
■
Like many LACs, in Colombia inflation drop steadily during the nineties. In inflow periods nontradable inflation tends to increase relative to tradable. In outflow periods tradable inflation tends to increase relative to nontradable.
● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 15/42
What about Inflation?
Monetary Policy in Colombia
■
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock
■
■
● What about Inflation? ● Inflation ● Inflation and RER
■
Like many LACs, in Colombia inflation drop steadily during the nineties. In inflow periods nontradable inflation tends to increase relative to tradable. In outflow periods tradable inflation tends to increase relative to nontradable. There is low degree of pass through to total inflation.
The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 15/42
What about Inflation?
Monetary Policy in Colombia
■
Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock
■
■
● What about Inflation? ● Inflation ● Inflation and RER
■
The Model
■
Like many LACs, in Colombia inflation drop steadily during the nineties. In inflow periods nontradable inflation tends to increase relative to tradable. In outflow periods tradable inflation tends to increase relative to nontradable. There is low degree of pass through to total inflation. A full-fledged IT regime started in September 1999
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 15/42
Inflation
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 16/42
Inflation and RER
Monetary Policy in Colombia Stylized Facts ● Capital Inflows Facts ● Capital Outflows Facts ● Capital Flows and EMBI+ ● Capital Flows and RER ● Capital Flows and Investment ● Capital Flows and Asset Prices ● Capital Flows and GDP ● Remittances Shock ● What about Inflation? ● Inflation ● Inflation and RER The Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 17/42
Monetary Policy in Colombia Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation
The Model
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 18/42
A New Core Model
Monetary Policy in Colombia Stylized Facts
■
Small Open Economy Model with tradable and nontradable sectors.
The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 19/42
A New Core Model
Monetary Policy in Colombia
■
Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■
Small Open Economy Model with tradable and nontradable sectors. Firms: export-oriented and nontradables. ◆ Mining Exporting Firms (endowment). Perfect competition. ◆ Non-mining Exporting Firms. Use capital and labor. Perfect competition. ◆ Nontradable Firms. Use capital and labor. Imperfect competition. ◆ Importing firms (a la Burstein et al.) Perfect competition.
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 19/42
A New Core Model
Monetary Policy in Colombia
■
Stylized Facts The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks
■
Small Open Economy Model with tradable and nontradable sectors. Firms: export-oriented and nontradables. ◆ Mining Exporting Firms (endowment). Perfect competition. ◆ Non-mining Exporting Firms. Use capital and labor. Perfect competition. ◆ Nontradable Firms. Use capital and labor. Imperfect competition. ◆ Importing firms (a la Burstein et al.) Perfect competition. Households: consume NT and imported goods. Inelastic labor supply. Choose in which sector to work.
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 19/42
A New Core Model
Monetary Policy in Colombia
■
Stylized Facts The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization
■
Effect and importance of shocks Using the Model
■
Diego Rodríguez, September 22, 2006
Small Open Economy Model with tradable and nontradable sectors. Firms: export-oriented and nontradables. ◆ Mining Exporting Firms (endowment). Perfect competition. ◆ Non-mining Exporting Firms. Use capital and labor. Perfect competition. ◆ Nontradable Firms. Use capital and labor. Imperfect competition. ◆ Importing firms (a la Burstein et al.) Perfect competition. Households: consume NT and imported goods. Inelastic labor supply. Choose in which sector to work. Imperfect capital mobility.
Bringing a DSGE into Policy Environment in Colombia - p. 19/42
A New Core Model
Monetary Policy in Colombia
■
Stylized Facts The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization
■
Effect and importance of shocks Using the Model
■ ■
Diego Rodríguez, September 22, 2006
Small Open Economy Model with tradable and nontradable sectors. Firms: export-oriented and nontradables. ◆ Mining Exporting Firms (endowment). Perfect competition. ◆ Non-mining Exporting Firms. Use capital and labor. Perfect competition. ◆ Nontradable Firms. Use capital and labor. Imperfect competition. ◆ Importing firms (a la Burstein et al.) Perfect competition. Households: consume NT and imported goods. Inelastic labor supply. Choose in which sector to work. Imperfect capital mobility. Government: nontradable outlays, lump-transfers and Taylor rule to meet inflation target.
Bringing a DSGE into Policy Environment in Colombia - p. 19/42
Exogenous Variables
Monetary Policy in Colombia
■
Inflation Target, π.
Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? .
● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte .
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t .
● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
■
● Households (1) ● Households (2)
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t . Sovereign spread shock, t .
● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
■
● Households (1) ● Households (2) ● Households (3) ● Investment
■
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t . Sovereign spread shock, t . Net foreign transfers, T Rt .
● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
■
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■ ■
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t . Sovereign spread shock, t . Net foreign transfers, T Rt . Public expenditure, gt .
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
■
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■ ■ ■
Parameterization
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t . Sovereign spread shock, t . Net foreign transfers, T Rt . Public expenditure, gt . TFP in exporting sector, AX t .
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Exogenous Variables
Monetary Policy in Colombia
■
Stylized Facts
■
The Model ● A New Core Model ● Exogenous Variables
■
● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
■
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■ ■ ■
Parameterization Effect and importance of shocks
■
Inflation Target, π. Terms of trade: price of imports, PtM ? and exports, PtX? . Mining sector: mining prices, Pte∗ , and endowment, yte . US Nominal Interest rate, i∗t . Sovereign spread shock, t . Net foreign transfers, T Rt . Public expenditure, gt . TFP in exporting sector, AX t . TFP in nontradable sector, AN t .
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 20/42
Export Sector
Monetary Policy in Colombia
■
Total value of production:
Stylized Facts
st Pte∗ yte + st PtX∗ ytX + PtN ytN
The Model ● A New Core Model ● Exogenous Variables
where st is the nominal exchange rate, y e is exogenous and
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation
ytX
● Households (1) ● Households (2) ● Households (3) ● Investment
ytN
● Government ● Closing the Model Parameterization
■
Effect and importance of shocks
■
=
AX t
=
AN t
X X α kt N N α kt
X X 1−α lt
N N 1−α lt
Perfect competition implies P e∗ and P X∗ are exogenous. Optimization in non-mining export firms:
Using the Model
wtX
X PtX X yt = (1 − α ) X Pt lt
rtX Diego Rodríguez, September 22, 2006
PtX X ytX α X = Pt kt Bringing a DSGE into Policy Environment in Colombia - p. 21/42
Nontraded Sector
Monetary Policy in Colombia
■
Imperfect Competition and cost minimization implies:
Stylized Facts
wtN
The Model ● A New Core Model ● Exogenous Variables
=
RM CtN (1
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation
rtN
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■
Using the Model
Diego Rodríguez, September 22, 2006
RM CtN αN
ytN ktN
Calvo pricing with backward indexation:
Parameterization Effect and importance of shocks
=
ytN −α ) N lt N
ΠN t =
(1−θ)
εΠt−1 + (1 − ε)
PetN PtN
!
N (1−θ)
Πt
1 ! 1−θ
Bringing a DSGE into Policy Environment in Colombia - p. 22/42
Import Sector
Monetary Policy in Colombia
■
Two-part pricing: price-at-the-dock and distribution costs.
Stylized Facts
PtM = st PtM ∗ + ηPtN
The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector
■
● Import Sector ● Headline Inflation
ΠM t
● Households (1) ● Households (2) ● Households (3) ● Investment
eM =Π t
RERt−1 η + ΠN RERt−1 + η RERt−1 + η t
st PtM ∗ PtN
● Government ● Closing the Model Parameterization Effect and importance of shocks
This implies that imported inflation is:
■
e M is the imported inflation at the where RER = and Π t dock. Notice that this implies an imperfect pass through.
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 23/42
Headline Inflation ■
Monetary Policy in Colombia Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
■ ■
Total inflation is a combination of imported and non traded inflation. 1 " # 1−ω 1−ω 1−ω N M N Pt−1 M Pt−1 + (1 − γ) 1 + πt Πt = (γ) 1 + πt Pt−1 Pt−1
Exchange rate affects imported inflation. Nominal rigidities in non traded sector hit both types of goods.
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 24/42
Households (1)
Monetary Policy in Colombia
Objective:
The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
∞ X
ct1−σ max E0 β 1−σ t=0
Stylized Facts
s.t. : Pt wt (ltX
t
N X Pt ct + xt + xt + (Bt+1 − Bt ) + st Ft iet ≤ N N X X N + lt ) + rt kt + rt kt + π + it Bt + st (Ft+1 − Ft ) + st T Rt
where x is investment, F is net foreign debt, B are nominal domestic bonds, ie is the cost of borrowing abroad, T R are net foreign transfers and π are firms profits.
Bringing a DSGE into Policy Environment in Colombia - p. 25/42
Households (2)
Monetary Policy in Colombia Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization
Consumption is a compound of imported and non traded goods: ω ω−1 ω−1 ω−1 1 1 M ω ω ω ct = γ ω cN + (1 − γ) c t t
so, demands for both goods are: N −ω Pt = (1 − γ) ct cN t Pt
Effect and importance of shocks Using the Model
cM t =γ
PtM Pt
−ω
ct
where ω > 0 is the elasticity of substitution between imported and non traded goods.
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 26/42
Households (3)
Monetary Policy in Colombia Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model
Optimality conditions with respect to foreign bonds: # " −σ 1 ct Pt st+1 = βEt −σ 1 + iet ct+1 Pt+1 st and domestic bonds: "
c−σ Pt 1 t = βEt −σ 1 + it ct+1 Pt+1
#
Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 27/42
Investment
Monetary Policy in Colombia
In the export sector:
Stylized Facts The Model ● A New Core Model ● Exogenous Variables
X = (1 − δX )ktX + xX kt+1 t −
● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation
● Government ● Closing the Model Parameterization Effect and importance of shocks
xX t ktX
Φ 2
xN t ktN
− δX
2
ktX
− δN
2
ktN
and in the non traded sector:
● Households (1) ● Households (2) ● Households (3) ● Investment
Φ 2
N = (1 − δN )ktN + xN kt+1 t −
where δj is the depreciation in sector j = X, N and Φ is a real adjustment cost.
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 28/42
Government
Monetary Policy in Colombia
■
y t −1 it = ρit−1 + (1 − ρ) int + ϕπ (πt − π) + ϕy yt−1
Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation ● Households (1) ● Households (2)
Taylor Rule:
■
Lump sum taxes and unproductive expenditures in non traded goods.
● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 29/42
Closing the Model
Monetary Policy in Colombia Stylized Facts The Model ● A New Core Model ● Exogenous Variables ● Export Sector ● Nontraded Sector ● Import Sector ● Headline Inflation
The cost of foreign borrowing is: e ∗ it = it + t ψ exp(Ft − F ) − 1
where i∗ is the external interest rate, is a sovereign spread shock and Ft is the stock of net foreign debt.
● Households (1) ● Households (2) ● Households (3) ● Investment ● Government ● Closing the Model Parameterization Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 30/42
Monetary Policy in Colombia Stylized Facts The Model Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions
Parameterization
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 31/42
Calibration
Monetary Policy in Colombia Stylized Facts
■
Set parameters to be consistent with long run restrictions implied by the model and the data.
The Model Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 32/42
Calibration
Monetary Policy in Colombia
■
Stylized Facts The Model Parameterization ● Calibration ● Bayesian estimation
■
Set parameters to be consistent with long run restrictions implied by the model and the data. Build a model-consistent database (National Accounts to 3 sector database)
● Prior and Posterior Distributions Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 32/42
Calibration
Monetary Policy in Colombia
■
Stylized Facts The Model
■
Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions Effect and importance of shocks
■
Set parameters to be consistent with long run restrictions implied by the model and the data. Build a model-consistent database (National Accounts to 3 sector database) Compute model-consistent great ratios and detrend time series
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 32/42
Calibration
Monetary Policy in Colombia
■
Stylized Facts The Model
■
Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions
■
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
■
Set parameters to be consistent with long run restrictions implied by the model and the data. Build a model-consistent database (National Accounts to 3 sector database) Compute model-consistent great ratios and detrend time series Set parameters to match great ratios and volatility of investment and current account
Bringing a DSGE into Policy Environment in Colombia - p. 32/42
Bayesian estimation
Monetary Policy in Colombia Stylized Facts
■
For a given set of parameters we find the state transition equation
The Model Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 33/42
Bayesian estimation
Monetary Policy in Colombia
■
Stylized Facts The Model Parameterization ● Calibration ● Bayesian estimation
■
For a given set of parameters we find the state transition equation Add a measurement equation to the model dynamics to get its state space representation
● Prior and Posterior Distributions Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 33/42
Bayesian estimation
Monetary Policy in Colombia
■
Stylized Facts The Model
■
Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions Effect and importance of shocks
■
For a given set of parameters we find the state transition equation Add a measurement equation to the model dynamics to get its state space representation Use Kalman filter to obtain the likelihood function of the model
Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 33/42
Bayesian estimation
Monetary Policy in Colombia
■
Stylized Facts The Model
■
Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions
■
Effect and importance of shocks Using the Model
Diego Rodríguez, September 22, 2006
■
For a given set of parameters we find the state transition equation Add a measurement equation to the model dynamics to get its state space representation Use Kalman filter to obtain the likelihood function of the model Combine the likelihood function with the prior distribution of the parameters to compute the posterior density
Bringing a DSGE into Policy Environment in Colombia - p. 33/42
Bayesian estimation
Monetary Policy in Colombia
■
Stylized Facts The Model
■
Parameterization ● Calibration ● Bayesian estimation ● Prior and Posterior Distributions
■
Effect and importance of shocks Using the Model
■
■
Diego Rodríguez, September 22, 2006
For a given set of parameters we find the state transition equation Add a measurement equation to the model dynamics to get its state space representation Use Kalman filter to obtain the likelihood function of the model Combine the likelihood function with the prior distribution of the parameters to compute the posterior density Using numerical optimization compute the mean of the posterior density and use a Metropolis-Hasting algorithm to get the posterior distribution of the parameters
Bringing a DSGE into Policy Environment in Colombia - p. 33/42
Prior and Posterior Distributions
Monetary Policy in Colombia Stylized Facts The Model
Table 1: Prior and Posterior Distributions Parameter
Prior Distribution
Prior mean
Prior Std Dev
Posterior Mean
Parameterization
Posterior Conf. Interval
● Calibration ● Bayesian estimation
σ
Normal
0.2
0.1
0.2124
0.1338
0.2901
λs
Uniform [0,1)
0.5
0.2887
0.4341
0.3296
0.5472
● Prior and Posterior Distributions
λπ
Normal
1.5
0.25
1.6753
1.3261
1.9504
λy
Normal
0.125
0.125
-0.0423
-0.2055
0.2171
ρ T A ρ N A ρR∗
Uniform [0,1)
0.5
0.2887
0.0188
0.0002
0.0466
Uniform [0,1)
0.5
0.2887
0.2242
0.0487
0.4254
Uniform [0,1)
0.5
0.2887
0.5251
0.1309
0.9878
ρ X P ρy e
Uniform [0,1)
0.5
0.2887
0.1177
0.0000
0.1112
Uniform [0,1)
0.5
0.2887
0.4740
0.0747
0.9708
θ
Gamma
6
1.42
3.8275
2.6328
5.6365
AT
Inv. Gamma
0.1
∞
0.1374
0.0243
0.2023
AN T σR ∗
Inv. Gamma
0.1
∞
0.2640
0.2162
0.3186
Inv. Gamma
0.1
∞
0.0911
0.0274
0.1277
σ
PX σy e
Inv. Gamma
0.5
∞
0.2691
0.1954
0.4098
Inv. Gamma
0.1
∞
0.0392
0.0230
0.561
σµ
Inv. Gamma
0.05
∞
0.0271
0.0220
0.0315
Effect and importance of shocks Using the Model
σ σ
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 34/42
Monetary Policy in Colombia Stylized Facts The Model Parameterization Effect and importance of shocks ● Oil shock ● Terms of trade shock
Effect and importance of shocks
● Monetary policy shock ● Importance shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 35/42
Oil shock
Monetary Policy in Colombia Stylized Facts The Model Parameterization Effect and importance of shocks ● Oil shock ● Terms of trade shock ● Monetary policy shock ● Importance shocks Using the Model
r
y
0 −0.005
c
0.06
0.03
0.04
0.02
0.02
0.01
−0.01 −0.015 −0.02
5
10
15
20
0
5
xn
10
15
20
0
xt 0.2
0.02
0.15
0.15
0
0.1
0.1
−0.02
0.05
0.05
−0.04
5
10
15
20
0
5
pi
10
10
15
20
15
20
RER
0.2
0
5
15
20
15
20
−0.06
5
10
TB
0
0.01
−0.005
0
−0.01 −0.01
−0.015 −0.02
Diego Rodríguez, September 22, 2006
5
10
15
20
−0.02
5
10
Bringing a DSGE into Policy Environment in Colombia - p. 36/42
Terms of trade shock
Monetary Policy in Colombia Stylized Facts The Model
r
y
0
−0.06
0.02
0.05
Effect and importance of shocks
Using the Model
0.04
0.1 −0.04
● Monetary policy shock ● Importance shocks
0.06
0.15
−0.02
Parameterization
● Oil shock ● Terms of trade shock
c
0.2
5
10
15
20
0
5
xn
10
15
20
0
xt 0.4
0.05
0.3
0.3
0
0.2
0.2
−0.05
0.1
0.1
−0.1
5
10
15
20
0
5
pi
10
10
15
20
15
20
RER
0.4
0
5
15
20
15
20
−0.15
5
10
TB
0
0.02 0
−0.02
−0.02 −0.04 −0.06
Diego Rodríguez, September 22, 2006
−0.04 5
10
15
20
−0.06
5
10
Bringing a DSGE into Policy Environment in Colombia - p. 37/42
Monetary policy shock
Monetary Policy in Colombia −3
Stylized Facts The Model
10
x 10
−3
r 2
5
0
0
−2
x 10
−3
y 4
2 1
Effect and importance of shocks
● Monetary policy shock ● Importance shocks
c
3
Parameterization
● Oil shock ● Terms of trade shock
x 10
−5
5
10
15
20
−4
5
xn
10
15
20
0
5
xt
10
15
20
15
20
RER
0.04
0.02
0.02
0.02
0
0
0
−0.02
−0.02
Using the Model
−0.02
5
10
15
20
−0.04
5 −3
pi 0
2
x 10
10
15
20
15
20
−0.04
5
10
TB
0
−0.01
−2 −0.02 −0.03
Diego Rodríguez, September 22, 2006
−4 5
10
15
20
−6
5
10
Bringing a DSGE into Policy Environment in Colombia - p. 38/42
Importance shocks
Monetary Policy in Colombia Stylized Facts
Table 2: Variance Decomposition (in percent)
The Model
Traded TFP
Non traded TFP
Foreign Int. Rate
Export Prices
Mining
Monetary Policy
Interest Rate
7.36
56.53
0.90
28.66
6.13
0.42
Output
8.02
51.88
0.34
31.95
7.73
0.09
Consumption
8.81
47.22
0.71
35.39
7.72
0.15
Invest.Non traded
8.17
51.15
0.76
32.54
7.19
0.19
Invest.Traded
7.94
52.63
0.79
31.56
6.87
0.22
RER
14.88
13.13
1.15
61.40
7.25
2.19
Inflation
7.35
54.13
1.10
28.21
5.49
3.71
Parameterization Effect and importance of shocks ● Oil shock ● Terms of trade shock ● Monetary policy shock ● Importance shocks Using the Model
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 39/42
Monetary Policy in Colombia Stylized Facts The Model Parameterization Effect and importance of shocks
Using the Model
Using the Model ● Forecasting Performance(1) ● Forecasting Performance (2)
Diego Rodríguez, September 22, 2006
Bringing a DSGE into Policy Environment in Colombia - p. 40/42
Forecasting Performance(1)
Monetary Policy in Colombia Stylized Facts
Table 3: Forecasting errors in percent
The Model Parameterization Effect and importance of shocks
Quarters
Using the Model ● Forecasting Performance(1) ● Forecasting Performance (2)
Diego Rodríguez, September 22, 2006
1 2 3 4 5 6 7 8 9
Annual Inflation
Annual Inflation
real GDP
gap GDP
MTYNO
MMT
MTYNO
MMT
0.33 0.46 0.59 0.81 0.95 1.16 1.28 1.28 1.40
0.27 0.38 0.50 0.61 0.73 0.58 0.60 0.59 0.64
1.14 1.60 1.75 1.91 2.03 2.41 2.66 2.09 0.67
1.06 1.06 1.16 1.14 1.19 1.21 1.33 1.44 1.04
Bringing a DSGE into Policy Environment in Colombia - p. 41/42
Forecasting Performance (2)
Monetary Policy in Colombia Stylized Facts
Table 4: Forecasting errors in percent
The Model Parameterization
Quarters Ahead
Effect and importance of shocks Using the Model ● Forecasting Performance(1) ● Forecasting Performance (2)
Diego Rodríguez, September 22, 2006
1 2 3 4 5 6 7 8 9
Real Exchange Rate
GDP growth
MTYNO
MTYNO
10.11 11.74 13.30 14.52 14.95 19.51 24.11 27.55 24.15
0.31 0.67 1.07 1.48 1.58 1.49 1.51 1.46 1.11
Bringing a DSGE into Policy Environment in Colombia - p. 42/42
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