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ARGEM: A Dynamic Stochastic General Equilibrium Model for Argentina

  • Guillermo J. Escudé

    (Central Bank of Argentina)

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The last few years have seen an explosion of Dynamic and Stochastic General Equilibrium (DSGE) models built for policy analysis and forecasting in industrialized countries. The set of papers presented to the recent joint U.S. Federal Reserve Board-European Central Bank-IMF conference: "DSGE Modeling at Policymaking Institutions: Progress & Prospects" is a significant sample. The need for better microfounded models that can contribute to policy analysis is also experienced by developing country Central Banks. On top of the many difficulties encountered in developed countries in building, calibrating and/or estimating these models, those who seek to construct models that can be relevant in the developing country context find various additional difficulties. One of these stems from the fact that the models built for industrialized countries typically assume a freely floating exchange rate and hence can avoid modeling exchange rate policy. Most developing countries do not have a pure exchange rate float and their Central Banks regularly intervene in the foreign exchange market with varying degrees of intensity and frequency. While the opposite "corner" of a pure interest rate float with a monetary policy based on determining a path for the nominal exchange rate is not difficult to model, one of the challenges faced by developing country modelers is to incorporate intervention in the foreign exchange market as an additional tool available for a Central Bank that also intervenes in the "money" market (typically by determining an operational target for the short run interest rate). This is one of the main objectives of this paper, which on this topic builds on previous analysis by the author (see Escudé, 2006). The paper benefits from various recent developments in monetary macroeconomic modeling, including Christiano, Eichenbaum and Evans (2001) (CEE), Smets and Wouters (2003), Woodford (2003), and Adolfson, Laséen, Lindé and Villani (2005) (ALLV), to mention but a few. The model has been calibrated for the Argentine economy, and solved using Klein's (2000) generalized Schur decomposition methodology.

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This book is provided by Central Bank of Argentina, Economic Research Department in its series BCRA Paper Series with number 05 and published in 2008.
ISBN: 978-987-23532-9-2
Handle: RePEc:bcr:estudi:05
Contact details of provider: Postal: Reconquista 266 - C1003ABF - Buenos Aires
Phone: (54-11) 4348-3582
Fax: (54-11) 4000-1257
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  1. Argia M. Sbordone, 2001. "An Optimizing Model of U.S. Wage and Price Dynamics," Departmental Working Papers 200110, Rutgers University, Department of Economics.
  2. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  3. Michael Woodford & Pierpaolo Benigno, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," 2004 Meeting Papers 481, Society for Economic Dynamics.
  4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  5. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
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  7. Bofinger, Peter & Wollmershäuser, Timo, 2001. "Managed floating: Understanding the new international monetary order," W.E.P. - Würzburg Economic Papers 30, University of Würzburg, Chair for Monetary Policy and International Economics.
  8. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  9. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal Stabilization Policy When Wages and Prices are Sticky: The Case of a Distorted Steady State," CEPR Discussion Papers 4740, C.E.P.R. Discussion Papers.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  11. Galí, Jordi & Monacelli, Tommaso, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," CEPR Discussion Papers 3346, C.E.P.R. Discussion Papers.
  12. Bianca De Paoli, 2004. "Monetary policy and welfare in a small open economy," LSE Research Online Documents on Economics 19950, London School of Economics and Political Science, LSE Library.
  13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
  14. Malin Adolfson & Stefan Laseen & Jesper Lindé & Mattias Villani, 2005. "An estimated New Keynesian small open economy model," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  15. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  16. Jeffery D. Amato, 2005. "The role of the natural rate of interest in monetary policy," BIS Working Papers 171, Bank for International Settlements.
  17. Anderson, Gary S., 2010. "A reliable and computationally efficient algorithm for imposing the saddle point property in dynamic models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 472-489, March.
  18. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, June.
  19. Juillard, Michael & Kamenik, Ondra & Kumhof, Michael & Laxton, Douglas, 2008. "Optimal price setting and inflation inertia in a rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2584-2621, August.
  20. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  21. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  22. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics 9415, Faculty of Economics, University of Cambridge.
  23. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  24. Rochelle Edge & Michael Kiley & Jean-Philippe Laforte, 2005. "An estimated DSGE model of the US economy with an application to natural rate measures," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  25. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
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