The BCRA’s Small Economic Model

The use of macroeconomic forecasting models is a common practice in central banks for monetary policy design, for the analysis of the current economic developments and for medium and long term forecasts. Among those models, the small-scale macroeconomic models stand out. Though relatively simple, they are structured and take into account the transmission mechanisms that relate the main variables of interest: the interest rate, the exchange rate, GDP and inflation. The Small Economic Model (MEP) developed by the Central Bank of Argentina describes in a stylized and structured way the macroeconomic dynamics of a small and open country such as Argentina. This paper describes the structure of the MEP model in its two versions: an original version that is the core of the model and a second one that introduces the intervention of the monetary authority in the money and exchange rate markets. The main characteristics and limitations of the model and the estimation of parameters are depicted, and examples of the impulse-response functions resulting from both specifications are provided. Finally, the future research lines tending to strengthen the tools used by the BCRA for analysis, simulation and forecast are also mentioned.