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Estimating Models for Monetary Policy Analysis in Emerging Countries

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  • Javier García-Cicco

Abstract

We estimate a DSGE model of an emerging country containing many frictions that, as has been recently argued, impose non-trivial constraints for monetary-policy design in these economies. In particular, our framework features a sectoral decomposition of the productive sector, the use of intermediate inputs, imperfect pass-through, endogenous premium to finance capital accumulation, balance sheet effects due to liability dollarization, currency substitution, price and wage stickiness, and dynamics driven by eleven shocks. We use a Bayesian approach to Mexican data to address three main questions: i) can the model satisfactorily fit the data? Our answer is generally yes, with some caveats; ii) are the estimated parameters similar to those usually calibrated in policy-related studies? The answer is negative, particularly for those describing financial frictions, price stickiness and money demand. Finally, which of the emerging-markets’ frictions are more relevant in fitting the data? We find that including intermediate inputs is most important, while currency substitution does not seem to play a major role. Moreover, financial frictions and liability dollarization are also relevant.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 561.

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Date of creation: Mar 2010
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Handle: RePEc:chb:bcchwp:561

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
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  3. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2007. "Monetary Rules in Emerging Economies with Financial Market Imperfections," School of Economics Discussion Papers, School of Economics, University of Surrey 0807, School of Economics, University of Surrey.
  4. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  6. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach," Working Papers Central Bank of Chile, Central Bank of Chile 381, Central Bank of Chile.
  7. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  8. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 116(511), pages 478-506, 04.
  9. Elekdag, Selim & Tchakarov, Ivan, 2007. "Balance sheets, exchange rate policy, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 31(12), pages 3986-4015, December.
  10. Nicoletta Batini & Joseph Pearlman & Paul Levine, 2006. "Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets," Computing in Economics and Finance 2006 148, Society for Computational Economics.
  11. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2006. "New Keynesian Models For Chile During the Inflation Targeting Regime: A Structural Approach," Working Papers Central Bank of Chile, Central Bank of Chile 402, Central Bank of Chile.
  12. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
  13. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
  14. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
  15. Juan Pablo Medina & Claudio Soto, 2005. "Oil Shocks and Monetary Policy in an Estimated DSGE Model for a Small Open Economy," Working Papers Central Bank of Chile, Central Bank of Chile 353, Central Bank of Chile.
  16. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1155-1181, September.
  17. Pablo Andres Neumeyer & Martín Gonzalez Rozada, 2003. "The elasticity of Substitution in demand for Non tradable Goods in Latin America. Case Study: Argentina," Department of Economics Working Papers 027, Universidad Torcuato Di Tella.
  18. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  19. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, December.
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Cited by:
  1. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.
  2. Selim Elekdag & Harun Alp, 2011. "The Role of Monetary Policy in Turkey During the Global Financial Crisis," IMF Working Papers 11/150, International Monetary Fund.
  3. Nan Li & Ceyhun Bora Durdu & Emine Boz, 2010. "Labor Market Search in Emerging Economies," 2010 Meeting Papers 255, Society for Economic Dynamics.
  4. Selim Elekdag & Subir Lall & Harun Alp, 2012. "An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09," IMF Working Papers 12/35, International Monetary Fund.
  5. Subir Lall & Selim Elekdag & Harun Alp, 2012. "Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008-2009?," IMF Working Papers 12/5, International Monetary Fund.
  6. Harun Alp & Selim Elekdag, 2012. "Shock Therapy! What Role for Thai Monetary Policy?," IMF Working Papers 12/269, International Monetary Fund.

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