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Macroeconomic Model Spillovers and Their Discontents

  • Tamim Bayoumi
  • Francis Vitek

The Great Recession underlined that policies in some countries can have profound spillovers elsewhere. Sadly, the solution of simulating large macroeconomic models to measure these spillovers has been found wanting. Typical models generate lower international correlations of output and financial asset prices than are seen in even pre-crisis data. Imposing higher financial market correlations creates more reasonable cross-country spillovers, and is likely to become the norm in policy modeling despite weak theoretical underpinnings, as is already true of sticky wages. We propose using event studies to calibrate market reactions to particular policy announcements, and report results for U.S. monetary and fiscal policy announcements in 2009 and 2010 that are plausible and event-specific.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/4.

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Length: 25
Date of creation: 08 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/4
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  1. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  2. Refet Gürkaynak & Brian Sack & Eric Swanson, 2004. "Do actions speak louder than words? the response of asset prices to monetary policy actions and statements," Finance and Economics Discussion Series 2004-66, Board of Governors of the Federal Reserve System (U.S.).
  3. Francis Vitek, 2010. "Monetary Policy Analysis and Forecasting in the Group of Twenty; A Panel Unobserved Components Approach," IMF Working Papers 10/152, International Monetary Fund.
  4. James H. Stock & Mark W. Watson, 2005. "Understanding Changes In International Business Cycle Dynamics," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 968-1006, 09.
  5. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
  6. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2011. "Vertical Linkages and the Collapse of Global Trade," American Economic Review, American Economic Association, vol. 101(3), pages 308-12, May.
  7. Francis Vitek, 2012. "Policy Analysis and Forecasting in the World Economy; A Panel Unobserved Components Approach," IMF Working Papers 12/149, International Monetary Fund.
  8. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
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