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A Panel Discussion on DSGE Modelling at Central Banks: Country Practices and How It Is Used in Policy Making by Surach Tanboon Monetary Policy Department Bank of Thailand Presented at the SEACEN-CCBS/BOE-BSP Workshop on Dynamic Stochastic General Equilibrium Modeling and Econometric Techniques November 23–27, 2009 Manila, Philippines

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A Panel Discussion on DSGE Modelling at Central Banks: Country Practices and How It Is Used in Policy Making by Surach Tanboon Monetary Policy Department Bank of Thailand - PowerPoint PPT Presentation

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Page 1: A Panel Discussion on

A Panel Discussion onDSGE Modelling at Central

Banks:Country Practices and How It Is

Used in Policy Making by

Surach TanboonMonetary Policy Department

Bank of Thailand

Presented at the SEACEN-CCBS/BOE-BSP Workshop on

Dynamic Stochastic General Equilibrium Modeling and Econometric Techniques

November 23–27, 2009Manila, Philippines

Page 2: A Panel Discussion on

2222Macro Modeling at Bank of Thailand

Bank of Thailand Macroeconometric Model (BOTMM)– Principal model for forecasting

and policy analysis Small New-Keynesian Model

– Used in policy analysis DSGE Model

– Work in progress, currently used to study special issues

– Aimed to complement BOTMM in MPC process

Page 3: A Panel Discussion on

Households

Domestic Firms

Consume

Hire inputs and produce

AGENT

FUNCTIONS

FEATURES

Export Firms

BanksTake deposits from households;lend to firms

GovernmentCentral

Bank

Supply labor to firms and set wage

Deposit funds with banks;trade foreign bonds

Consumption habit persistence

Monopolistic competitive labor market; wage rigidities

Monopolistic competitive local market; price rigidity

Competitive export market

External finance premium

Spend according to fiscal rule

Set interest rate according to monetary policy rule

Fixed proportion of nominal GDPInflation targeting

External finance premium

3

Capital Producer

Invest and supply capital to firms

Investment adjustment costs

Model Environment

Debt-contingent premium on foreign borrowing

Page 4: A Panel Discussion on

44444

Firms

Retailers

labor

Households

Capital produce

r

capital

wholesale good

final good(for

investment)

final good(for consumption)

No Financial Accelerator

Firms Households

capital

Banks

EXTERNAL FINANCE: loans

BALANCESHEET

BALANCESHEET

Capital produce

r

Macro-financial linkage

With Financial Accelerator

4

labor

Key MechanismInverse relationship between

borrower’s balance sheetconditions and premium for

external finance

EXTERNAL FINANCE: deposits

Page 5: A Panel Discussion on

5555

Determination of RD Case 1 QKD < ND

N o need to seek externa l finance;E xternal finance premiu

m is zero

Case 2 ND < QKD < ND + NBD

Firm needs to borrow & bank can cover firm’s demand with its own internal funds

Case 3 QKD > ND + NBD

Bank cannot cover firm’s demand;pays premium when raise external funds; in

turn passes this premiu m onto firms

Model Highlight 1: Double financial accelerator

Source: Sunirand (2002)

Page 6: A Panel Discussion on

6666Model Highlight 2: Euler rate puzzle

Canzoneri, Cumby, and Diba (2007) and Reynard and Schabert (2009)– Euler rate is empirically not related

to observed policy rates Here, bank’s external finance premium acts as wedge between policy rate and deposit rate–Hence interest rate at which

households use for discountingis different from Euler rate

Page 7: A Panel Discussion on

0 5 10 15 20

-10

-5

0

Equity/Assets

0 5 10 15 20

0

0.2

0.4

0.6

Premium

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-10

-5

0

Investment

0 5 10 15 20

-0.4

-0.2

0

0.2Policy interest rate

Without AcceleratorWith AcceleratorWith Accelerator - higher premium sensitivity

7777

Eq

uit

y

sh

ock

0 5 10 15 20

-10

-5

0

Equity/Assets

0 5 10 15 20

0

0.2

0.4

0.6

Premium

0 5 10 15 20

-10

-5

0

Investment

0 5 10 15 20

-0.4

-0.2

0

0.2Policy interest rate

Without AcceleratorWith AcceleratorWith Accelerator - higher premium sensitivity

Financial accelerator intensified: external finance premium becomes more sensitive to balance sheet conditions

0 5 10 15 20

-10

-5

0

Equity/Assets

0 5 10 15 20

0

0.2

0.4

0.6

Premium

0 5 10 15 20

-10

-5

0

Investment

0 5 10 15 20

-0.4

-0.2

0

0.2Policy interest rate

Without AcceleratorWith AcceleratorWith Accelerator - higher premium sensitivity

Model insight: Higher degree of monetary policy accommodation

during crisis times

Page 8: A Panel Discussion on

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Plan Ahead

Start inducting DSGE model in MPC process–Policy analysis– Forecasting

Issues to work out– Estimating the model– Striking balance between simplicity

and complexity•Communication between modelers and policymakers/sector specialists

–Dealing with nonmodeled variables– Incorporating off-model information

•Large cross-section data, high-frequency indicators, judgment

– Introducing risks and uncertainty in model