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A Structural Macro-Econometric Model of the Maltese Economy

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  • Grech, Aaron George
  • Grech, Owen
  • Micallef, Brian
  • Rapa, Noel
  • Gatt, William

Abstract

This paper presents a structural macro-econometric model of the Maltese economy developed at the Modelling & Research Office of the Central Bank of Malta during 2012. This model is small-scale, consisting of 19 behavioural equations (estimated on quarterly data from 2000 to 2011) and 130 identities. There are 33 exogenous variables, mostly economic variables for trading partners, commodity prices, demographic developments and fiscal variables. The model is built around the neoclassical synthesis, with sluggish adjustment of wages and prices in the short run and also some inertia of real variables in response to shocks. Economic agents are assumed to have adaptive expectations. There are four blocks in the model. The supply block is composed of a Cobb-Douglas production function and a demand for labour equation. The aggregate demand block has six behavioural equations explaining the components of real GDP. The wage/price block includes four equations for the aggregate demand components of real GDP, a private wage function and a house price equation. The financial block models consumer credit and mortgage credit, with three other equations determining the pass-through of the policy rate to lending rates. This paper also presents the economic impact of four simulated shocks: an increase in the policy rate, a rise in oil prices, an appreciation of the euro against the US dollar and higher world demand. The simulations confirm that the impact of monetary policy is weak in Malta while that of a change in foreign demand is quite strong. The exposure of the Maltese economy to shocks in oil prices and in the value of the US dollar also appears to be relatively significant. This paper is meant to constitute an intermediate stage in the structural model’s development. In future there will be further refinements, such as an enhanced integration of the supply side, the inclusion of an endogenous fiscal block, a more detailed financial block and further sectorial disaggregation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46128.

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Date of creation: Apr 2013
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Handle: RePEc:pra:mprapa:46128

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Keywords: Macro-econometric modelling; Malta;

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References

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  1. Vetlov, Igor, 2004. "The Lithuanian block of the ESCB multi-country model," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 13/2004, Bank of Finland, Institute for Economies in Transition.
  2. Grech, Aaron George, 2003. "Assessing employment in Malta," MPRA Paper 33380, University Library of Munich, Germany.
  3. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series, European Central Bank 0042, European Central Bank.
  4. Dimitrios Sideris & Nicholas G. Zonzilos, 2005. "The Greek Model of the European System of Central Banks Multi-Country Model," Working Papers, Bank of Greece 20, Bank of Greece.
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Cited by:
  1. Grech, Aaron George, 2014. "An estimate of the possible impact of lower electricity and water tariffs on the Maltese economy," MPRA Paper 57130, University Library of Munich, Germany.

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