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3rd course PhD student Ishuova Zh.Sh.
Al Farabi Kazakh National University
Construction of DSGE model with not absolutely flexible prices
and by the National Bank of Kazakhstan acting according to a
Taylor rule
Dynamic stochastic general equilibrium models for the monetary policy analysis
are widely used among central banks. These models are used to discuss central
banks’ behavior in different economic development scenarios [1]. We model the
Kazakhstan’s economy as a small open economy represented by the unit interval.
Since the economy is of measure zero, its domestic policy decisions do not have any
impact on the rest of the world. Next we describe in detail the problem facing
households and firms located in Kazakhstan’s economy. Variables with an i ϵ [0, 1]
subscript refer to economy i, one among the continuum of economies making up the
world economy.
A typical small open economy is inhabited by a representative household who

E 0   tU C t , N t  ,
seeks to maximize
where Nt denotes hours of labor, and Ct is a
t 0

composite consumption index defined by
1
1
 1
 1   1

C t  1    C H ,t      C F ,t    ,


where CH,t is
an index of consumption of domestic goods given by the CES function

C H ,t
 1
 1
  1
   C H ,t  j   dj  ,
0


where j ϵ [0, 1] denotes the good variety. CF,t is an index of

imported goods given by C F ,t
 1
 1
  1
   Ci ,t   di  ,
 0

where Ci,t is, in turn, an index of the
quantity of goods imported from country i and consumed by domestic households. It

is given by an analogous CES function
 1
 1
  1
Ci ,t    Ci ,t  j   dj  .
0


Notice that parameter
ε>1 denotes the elasticity of substitution between varieties (produced within any
given country). Parameter α ϵ [0, 1] is related to the degree of home bias in
preferences, and is thus a natural index of openness. Parameter η>0 measures the
substitutability between domestic and foreign goods, from the viewpoint of the
domestic consumer, while measures the substitutability between goods produced in
different foreign countries [2]. To estimate the model we use quarterly data for the
period from 1992Q1 to 20012Q4. We choose the following seven observable
variables: real GDP, short-run real interest rate, a measure of core inflation computed
by the National Bank of Kazakhstan, the real exchange rate, nominal exchange rate
devaluation, real wages and labor input. We also utilize series on oil imports and the
real price of oil. We discuss the effects of an oil shock – an increase in the real price
of oil – on different domestic variables. We present some impulse–response functions
generated under the preferred model and we compare the outcome with the one that
would have been obtained under different policy rules, and under flexible wages and
prices.
Figure 1. Reaction of interest rates and inflation on the interest rate shock
In the first version of monetary policy is assumed that the National Bank will
apply the following parameters of monetary rules: ϕπ=2.5 and ϕy=1. It means that the
interest rate will increase by 1.5% if inflation exceeds its target by 1%.
Figure 2. Reaction of the output gap and its components on the technology shock:
Nominal interest rate, as opposed to the real, after the shock almost unchanged.
It is increased only by 0.01%. Although the initial shock is 1%, this leads to deflation
and the formation of a negative output gap, and hence to the necessity reducing the
interest rate of the National Bank (see figure 1–2). Comparing the analysis of
consequences of monetary policy options for the Republic of Kazakhstan with data
for the Russian Federation and Republic of Belarus in the works of Ivashchenko [3]
and Drobyshevsky [4], we can conclude that monetary policy in the Republic of
Kazakhstan meets the standards adopted in the leading countries: a clear anti-inflation
policy is evident (a growth in inflation by 1 percentage point results in a rate increase
of 0.75%).
References:
1. Poghosyan K. and G. Barseghyan. DSGE model of open economy with sticky
wages and prices (the case of Armenia) [Electronic resource] // CIS Research
Network. – URL: http://www.eerc.ru/Selected/Fall_2011/Poghosyan_Proposal.pdf.
2. Galí J. and T. Monacelli. Monetary Policy and Exchange Rate Volatility in a Small
Open Economy // NBER Working paper №8905. –2002 – pp. 1–43.
3. Ivashchenko A.S. Impact of monetary shocks on macroeconomic dynamics
[Electronic Res.] // URL: http://mmaetst.narod.ru/archieve/251110_seminar_ai.pdf.
4. Drobyshevsky S.M., Trunin P.V., Kamenskih M.V. Analysis of the rules of
monetary policy of the Bank of Russia in 1999-2007. // Institute of the Economy in
transitional period. Working paper №127. – 2009. – 88p.