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A small forward-looking inter-country model (Belarus, Russia and Ukraine)

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Author Info

  • Charemza, Wojciech
  • Makarova, Svetlana
  • Prytula, Yaroslav
  • Raskina, Julia
  • Vymyatnina, Yulia

Abstract

The paper describes an inter-country model developed on the New Keynesian Phillips curve principle for the economies of Belarus, Russia and Ukraine. Technically the modelling idea has been grounded within the concept of the infinite dimensional vector autoregressive models by Chudik and Pesaran [Chudik A., Pesara M.H., 2007. Infinite-dimensional VAR's and factor models. IZA; DP No. 3206]. The main developments are such that the model is 1) interdependent rather than vector autoregressive, 2) estimated by the generalised method of moments and 3) forward-looking. The primary linkage of the country models is provided through the real effective exchange rates of particular countries, while the secondary linkages are through the Chudik and Pesaran cross-sectional augmentations. A series of Monte Carlo experiments confirms that the small cross-dimension of the model and a possible dominance of one country in the panel (Russia) should not distort the results in a significant way. A series of stochastic simulation experiments made with and without the assumption of observational equivalence principle shows a possible spread of the Dutch Disease from Russia to other countries in the model.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 6 (November)
Pages: 1172-1183

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1172-1183

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Modelling transition economies Inter-country model Forward-looking expectations Dutch Disease;

References

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  1. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
  2. Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR).
  3. M. Hashem Pesaran & Til Schuermann & L. Vanessa Smith, 2008. "Forecasting Economic and Financial Variables with Global VARs," CESifo Working Paper Series 2263, CESifo Group Munich.
  4. Alexander Chudik & M. Hashem Pesaran, 2009. "Infinite-dimensional VARs and factor models," Working Paper Series 998, European Central Bank.
  5. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
  6. Oomes , Nienke & Kalcheva, Katerina, 2007. "Diagnosing Dutch disease: Does Russia have the symptoms?," BOFIT Discussion Papers 7/2007, Bank of Finland, Institute for Economies in Transition.
  7. L. Lungu & K. G. P. Matthews, 2002. "Partial Current Information and Signal Extraction in a Rational Expectations Macroeconomic Model: A Computational Solution," Computing in Economics and Finance 2002 115, Society for Computational Economics.
  8. Wickens, Michael R, 1986. "The Estimation of Linear Models with Future Rational Expectations by Efficient and Instrumental Variable Methods," CEPR Discussion Papers 111, C.E.P.R. Discussion Papers.
  9. Gianluca Benigno & Pierpaolo Benigno, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 279, European Central Bank.
  10. Ray Fair, 2001. "Optimal Control and Stochastic Simulation of Large Nonlinear Models with Rational Expectations," Yale School of Management Working Papers ysm202, Yale School of Management, revised 24 Sep 2001.
  11. Matsen, Egil & Torvik, Ragnar, 2005. "Optimal Dutch disease," Journal of Development Economics, Elsevier, vol. 78(2), pages 494-515, December.
  12. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Wiley Blackwell, vol. 72(3), pages 707-734, 07.
  13. Sachs, Jeffrey D. & Warner, Andrew M., 2001. "The curse of natural resources," European Economic Review, Elsevier, vol. 45(4-6), pages 827-838, May.
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