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A small forward-looking inter-country model (Belarus, Russia and Ukraine)

  • Charemza, Wojciech
  • Makarova, Svetlana
  • Prytula, Yaroslav
  • Raskina, Julia
  • Vymyatnina, Yulia

The paper describes an inter-country model developed on the New Keynesian Phillips curve principle for the economies of Belarus, Russia and Ukraine. Technically the modelling idea has been grounded within the concept of the infinite dimensional vector autoregressive models by Chudik and Pesaran [Chudik A., Pesara M.H., 2007. Infinite-dimensional VAR's and factor models. IZA; DP No. 3206]. The main developments are such that the model is 1) interdependent rather than vector autoregressive, 2) estimated by the generalised method of moments and 3) forward-looking. The primary linkage of the country models is provided through the real effective exchange rates of particular countries, while the secondary linkages are through the Chudik and Pesaran cross-sectional augmentations. A series of Monte Carlo experiments confirms that the small cross-dimension of the model and a possible dominance of one country in the panel (Russia) should not distort the results in a significant way. A series of stochastic simulation experiments made with and without the assumption of observational equivalence principle shows a possible spread of the Dutch Disease from Russia to other countries in the model.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 6 (November)
Pages: 1172-1183

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1172-1183
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  1. Chudik, Alexander & Pesaran, M. Hashem, 2007. "Infinite Dimensional VARs and Factor Models," IZA Discussion Papers 3206, Institute for the Study of Labor (IZA).
  2. Vittorio Corbo & José Tessada, 2005. "Response to External and Inflation Schoks in a Small Open Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 2, pages 029-056 Central Bank of Chile.
  3. M. Hashem Pesaran & Til Schuermann & L. Vanessa Smith, 2008. "Forecasting economic and financial variables with global VARs," Staff Reports 317, Federal Reserve Bank of New York.
  4. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Ray Fair, 2001. "Optimal Control and Stochastic Simulation of Large Nonlinear Models with Rational Expectations," Yale School of Management Working Papers ysm202, Yale School of Management, revised 24 Sep 2001.
  6. L. Lungu & K. G. P. Matthews, 2002. "Partial Current Information and Signal Extraction in a Rational Expectations Macroeconomic Model: A Computational Solution," Computing in Economics and Finance 2002 115, Society for Computational Economics.
  7. Oomes , Nienke & Kalcheva, Katerina, 2007. "Diagnosing Dutch disease: Does Russia have the symptoms?," BOFIT Discussion Papers 7/2007, Bank of Finland, Institute for Economies in Transition.
  8. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
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  10. Benigno, Gianluca & Benigno, Pierpaolo, 2003. "Designing targeting rules for international monetary policy cooperation," Working Paper Series 0279, European Central Bank.
  11. Matsen, Egil & Torvik, Ragnar, 2005. "Optimal Dutch disease," Journal of Development Economics, Elsevier, vol. 78(2), pages 494-515, December.
  12. Wickens, Michael R., 1986. "The Estimation of Linear Models with Future Rational Expectations by Efficient and Instrumental Variable Methods," CEPR Discussion Papers 111, C.E.P.R. Discussion Papers.
  13. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
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