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A Small Structural Monetary Policy Model for Small Open Economies with Debt Accumulation

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  • Philippe D Karam
  • A. R. Pagan

Abstract

We extend a small New Keynesian structural model used for monetary policy analysis to address a richer class of policy issues that arise in open economy analysis. We draw a distinction between absorption and domestic output, and as the difference between the two is effectively the current account, there is now an explicit accumulation or decumulation of foreign liabilities in response to various shocks affecting the system. Such stock equilibria can now have an impact back on to the flows in the domestic economy. We perform simulations using parameters calibrated to the Canadian economy and compare the differences in impulse responses from the original model. Advantages in a forecasting environment owing to the ability to impose explicit projections about imports and exports are also exposed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/64.

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Length: 22
Date of creation: 01 Mar 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/64

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Related research

Keywords: Emerging markets; Forecasting models; inflation; terms of trade; open economy; monetary policy; foreign currency; inflation rate; trade shock; terms of trade shock; open economies; nominal interest rate; annual inflation rate; oil prices; annual inflation; real interest rates; relative price; output growth; domestic economy; domestic goods; inflation targeting; terms of trade shocks; relative prices; price level; inflation target; inflation equation; economic outcomes; equilibrium model; world markets; inflation rates; price of imports; trade shocks; real interest rate; price inflation; imported goods; change in inflation; domestic consumption; import prices; closed economy; aggregate imports; trade flows; domestic production; forecasting inflation;

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References

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  1. Casares, Miguel & McCallum, Bennett T., 2006. "An optimizing IS-LM framework with endogenous investment," Journal of Macroeconomics, Elsevier, vol. 28(4), pages 621-644, December.
  2. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "Practical Model-Based Monetary Policy Analysis," IMF Working Papers 06/81, International Monetary Fund.
  3. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," 2006 Meeting Papers 479, Society for Economic Dynamics.
  4. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  5. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  6. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  7. Jordi Gal´┐Ż & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  8. Hostland, Doug & Karam, Philippe, 2006. "Assessing debt sustainability in emerging market economies using stochastic simulation methods," Policy Research Working Paper Series 3821, The World Bank.
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Citations

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Cited by:
  1. Poghosyan, K., 2012. "Structural and reduced-form modeling and forecasting with application to Armenia," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5590845, Tilburg University.
  2. Poghosyan, Karen & Boldea, Otilia, 2013. "Structural versus matching estimation: Transmission mechanisms in Armenia," Economic Modelling, Elsevier, vol. 30(C), pages 136-148.
  3. Mardi Dungey & M.Tugrul Vehbi, 2011. "A SVECM Model of the UK Economy and The Term Premium," CAMA Working Papers 2011-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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