Occasional Paper 164--MULTIMOD Mark III --Section I and II

Occasional Paper 164--MULTIMOD Mark III --Section I and II

23 Pages · 1998 · 115 KB · English

MULTIMOD Mark III : the core dynamic and steady-state models / Other Modifications. 65 . Douglas Laxton, senior economist, took command.

Occasional Paper 164--MULTIMOD Mark III --Section I and II free download


OCCASIONAL PAPER 164 MULTIMOD Mark III The Core Dynamic and SteadyState Models Douglas Laxton, Peter Isard, Hamid Faruqee, Eswar Prasad, and Bart Turtelboom INTERNATIONAL MONETARY FUND Washington DC May 1998 ?1998 International Monetary Fund Cover design, charts, and composition: Theodore F Peters Jr, Choon Lee, and IMF Graphics Section Library of Congress CataloginginPublication Data MULTIMOD Mark III:the core dynamic and steadystate models / Douglas Laxton [et al] ? Washington, DC : International Monetary Fund, [1998] pcm ? (Occasional paper, ISSN 02516365 ; no 164) Includes bibliographical references ISBN 1557757224 1Econometric models2 Economic forecasting ? Econometric models3 Economic policy ? Econometric models4 International finance ? Econometric models5 Macroeconomics ? Econometric models ? Evaluation I Laxton, Douglas II Series:Occasional paper (International Monetary Fund) ; no 164 HB141M84 1998 Price: US$1800 (US$1500 to fulltime faculty members and students at universities and colleges) Please send orders to: International Monetary Fund, Publication Services 700 19th Street, NW, Washington, DC 20431, USA Tel: (202) 6237430Telefax: (202) 6237201 Email: [email protected] Internet: http://wwwimforg recycled paper Page Prefacevii IIntroduction1 Overview1 What?s New?1 IIThe Philosophy and Basic Structure of MULTIMOD5 Philosophical Underpinnings5 History and Country Disaggregation8 Commodity Disaggregation and Behavioral Units8 The Supply Side and the UnemploymentInflation Nexus9 Consumption, Investment, and International Trade9 Fiscal Policy: Government Spending, Taxes, and Debt 10 Monetary Policy 10 Oil, Primary Commodities, and Nontradables11 Financing Constraints and Absorption for Developing Countries14 Accounting Identities, Arbitrage Conditions, Interest Rates, and Exchange Rates16 IIIThe SteadyState Analogue Model and Mark III Solution Methodology17 An Example of Parallel Equations in DYNMOD and SSMOD17 The SteadyState Model as an Interpretive Device18 On Using SSMOD to Construct the Control Solution19 On Using SSMOD to Obtain Terminal Conditions22 The Mark III Solution Methodology22 IVThe InflationUnemployment Nexus23 The ShortRun TradeOff Between Inflation and Unemployment23 Implications of Linear and Convex Phillips Curves24 Specification of the Mark III Phillips Curve25 Intrinsic and Expectational Dynamics26 Proxies for Inflation Expectations26 Estimates of the Mark III Phillips Curve28 The Dynamic Effects of Output Gaps on Unemployment31 The CPI Equations and Import Price PassThrough33 Contents iii CONTENTS VConsumption and Saving Behavior:A LifeCycle Perspective37 The Basic Model39 Consumption39 The Behavior of Dynastic Households39 The LifeCycle Behavior of Disconnected Generations40 The Small Open Economy Case40 The Closed Economy Case42 Extensions42 Liquidity Constraints42 Population and Productivity Growth43 Income Profiles: Theory and Calibration44 Specification Issues44 Data and Estimation45 SteadyState Calibration45 Estimates of the Mark III Consumption Function47 AppendixFiscal Policy Effects in a Small Open Economy48 VIInvestment53 AppendixInvestment, Output, and Interest Rate Responses to Demand and Supply Shocks55 VIIInternational Trade57 Imports57 Exports59 Adding Up of World Trade and Current Account Balances61 VIIIExtensions of the Core Model64 Extensions of Country Coverage64 Other Modifications65 Fiscal Consolidation65 Endogenous Productivity Growth66 Military Expenditures66 References67 Boxes Section I1MULTIMOD: Summary of the Mark III Generation2 II2The Spillover Effects of Government Debt12 3Government Expenditure Multipliers Under Alternative Monetary Policy Reaction Functions14 III4Government Debt, Net Foreign Liabilities, and the Real Exchange Rate18 5Traditional Solution Techniques and the MARK III Methodology20 IV6Model of a Convex Phillips Curve27 7ASimple PriorConsistent Filter for Measuring the Natural Rate30 8Asymmetries and CountrySpecific Differences in the Real and Nominal Effects of Shocks32 V9The Global CrowdingOut Effects of Government Debt48 VIII10Steps Necessary to Integrate Additional Industrial Countries64 iv Contents Tables Section IV1Phillips Curve Model29 2Unemployment Equations33 3CPI Equations35 4Estimated Effects on the CPI of a 1 Percent Increase in Import Price35 V5Small Open Economy Model: Behavioral Equations and Laws of Motion42 6Closed Economy Model: Behavioral Equations and Laws of Motion42 7Extended Closed Economy Model with Liquidity Constraints and Population and Productivity Growth44 8Relative Income Profiles: Nonlinear Least Squares Estimates46 9Theoretical and Projected SteadyState Age Distributions47 10Estimated Parameters of the Mark III ConsumptionSaving Model 47 VII11Volume Equations for Imports59 12Bilateral Total Exports, 199660 13Volume Equations for Exports61 14Export Price Equations63 Box 2Effects of a FiveYear Temporary Tax Cut That Permanently Increases the DebttoGDPRatio of the United States by 10 Percentage Points13 3Effects of a 1 Percent of GDPPermanent Increase in Government Expenditure in Japan Under Alternative Monetary Policy Reaction Functions15 4LongRun Effects of Temporary Tax Cuts That Permanently Increase DebttoGDPRatios by 10 Percentage Points19 8The Asymmetric Effects of Positive and Negative Money Supply Shocks32 9SteadyState Effects of Simultaneous 10 Percentage Point Increases in Ratios of Government Debt to GDPof All Industrial Countries49 Figures Section IV1AConvex ShortRun Phillips Curve25 2Unemployment and Output Gaps34 V3Estimated Income Profiles46 4Higher Public Debt Through a Temporary Tax Cut in Canada50 5Higher Public Debt with Permanently Higher Fiscal Spending in Canada51 VI6Impulse Responses in

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