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Estimating Models for Monetary Policy Analysis in Emerging Countries

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  • Javier García-Cicco

Abstract

We estimate a DSGE model of an emerging country containing many frictions that, as has been recently argued, impose non-trivial constraints for monetary-policy design in these economies. In particular, our framework features a sectoral decomposition of the productive sector, the use of intermediate inputs, imperfect pass-through, endogenous premium to finance capital accumulation, balance sheet effects due to liability dollarization, currency substitution, price and wage stickiness, and dynamics driven by eleven shocks. We use a Bayesian approach to Mexican data to address three main questions: i) can the model satisfactorily fit the data? Our answer is generally yes, with some caveats; ii) are the estimated parameters similar to those usually calibrated in policy-related studies? The answer is negative, particularly for those describing financial frictions, price stickiness and money demand. Finally, which of the emerging-markets’ frictions are more relevant in fitting the data? We find that including intermediate inputs is most important, while currency substitution does not seem to play a major role. Moreover, financial frictions and liability dollarization are also relevant.

Suggested Citation

  • Javier García-Cicco, 2010. "Estimating Models for Monetary Policy Analysis in Emerging Countries," Working Papers Central Bank of Chile 561, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:561
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    References listed on IDEAS

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    Cited by:

    1. Selim Elekdag & Harun Alp, 2011. "The Role of Monetary Policy in Turkey During the Global Financial Crisis," IMF Working Papers 11/150, International Monetary Fund.
    2. Marco Airaudo & Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 16/55, International Monetary Fund.
    3. Emine Boz & Ceyhun Bora Durdu & Nan Li, 2009. "Labor market search in emerging economies," International Finance Discussion Papers 989, Board of Governors of the Federal Reserve System (U.S.).
    4. Selim Elekdag & Subir Lall & Harun Alp, 2012. "An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09," IMF Working Papers 12/35, International Monetary Fund.
    5. Subir Lall & Selim Elekdag & Harun Alp, 2012. "Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008-2009?," IMF Working Papers 12/5, International Monetary Fund.
    6. Airaudo, Marco, 2014. "Currency substitution, risk premia and the Taylor principle," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 202-217.
    7. Malikane, Christopher & Ojah, Kalu, 2014. "Fisher's Relation and the Term Structure: Implications for IS Curves," MPRA Paper 55553, University Library of Munich, Germany.
    8. Harun Alp & Selim Elekdag, 2012. "Shock Therapy! What Role for Thai Monetary Policy?," IMF Working Papers 12/269, International Monetary Fund.
    9. repec:eee:jimfin:v:81:y:2018:i:c:p:159-184 is not listed on IDEAS

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