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A Simple Dge Model for Inflation Targeting

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  • International Monetary Fund

Abstract

The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model''s calibration is intuitive and can draw on the vast experience many countries have with calibrating small ''gap'' models of monetary policy transmission. Moreover, the definition of the model''s steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model''s properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/197.

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Length: 96
Date of creation: 01 Aug 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/197

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Keywords: Inflation targeting; Monetary transmission mechanism; inflation; monetary policy; terms of trade; inflation target; relative price; central bank; relative prices; inflation rates; real interest rates; monetary transmission; real variables; nominal interest rate; foreign exchange; real exchange rates; inflation rate; nominal interest rates; monetary authority; real interest rate; monetary shocks; actual inflation; nominal variables; price elasticity; terms of trade shock; terms of trade shocks; price level; inflation stabilization; national bank; price inflation; inflation targeting regime; monetary fund; inflationary pressures; rising inflation; monetary phenomena; tight monetary policy; inflation-targeting; monetary targets; monetary policy rule; inflation forecasts; monetary policy transmission mechanism; low inflation; monetary analysis; wage inflation; inflationary expectations; rate of price change; gdp deflator; monetary stance; rise in inflation; monetary policy reaction function; real rates; increase in inflation; real output; monetary transmissions; steady-state inflation; monetary regime; post-crisis period; monetary shock; monetary injections; foreign currency; transmission of monetary policy; price stability; monetary policy framework;

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References

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  1. Ali Hakan Kara, 2006. "Turkish Experience With Implicit Inflation Targeting," Working Papers 0603, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Svensson, Lars E O, 2005. "Monetary Policy with Judgement: Forecast Targeting," CEPR Discussion Papers 5072, C.E.P.R. Discussion Papers.
  3. Kilian, Lutz & Gonçalves, Sílvia, 2002. "Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form," Discussion Paper Series 1: Economic Studies 2002,26, Deutsche Bundesbank, Research Centre.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  5. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
  6. Morten Ravn & Stephanie Schmitt-Grohé & Mart�n Uribe, 2006. "Deep Habits," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 195-218.
  7. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  8. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis: Overview," IMF Working Papers 06/80, International Monetary Fund.
  9. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
  10. Bahmani-Oskooee, Mohsen & Kara, Orhan, 2000. "Exchange rate overshooting in Turkey," Economics Letters, Elsevier, vol. 68(1), pages 89-93, July.
  11. Fabio Canova & Eva Ortega, 1996. "Testing calibrated general equilibrium models," Economics Working Papers 166, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Hakan Kara & Fethi Ogunc, 2005. "Exchange Rate Pass-Through in Turkey : It is Slow, but is it Really Low?," Working Papers 0510, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  13. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "Practical Model-Based Monetary Policy Analysis," IMF Working Papers 06/81, International Monetary Fund.
  14. John Geweke, 1999. "Computational Experiments and Reality," Computing in Economics and Finance 1999 401, Society for Computational Economics.
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Citations

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Cited by:
  1. Lavan Mahadeva & Juan Carlos parra, 2008. "Testing a DSGE model and its partner database," BORRADORES DE ECONOMIA 004507, BANCO DE LA REPÚBLICA.
  2. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  3. Ara Stepanyan & Era Dabla-Norris & Ashot Anatolii Mkrtchyan, 2009. "A New Keynesian Model of the Armenian Economy," IMF Working Papers 09/66, International Monetary Fund.

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