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Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia

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  • Lie, Denny

Abstract

This paper builds a small open economy dynamic stochastic general equilibrium (DSGE) model for Indonesia with state-dependent pricing (SDP) and studies its implications for policy analysis. Variations in the extensive margin of price adjustment under SDP are shown to non-trivially affect the model-generated variance decompositions and impulse responses to various shocks. DSGE model-based policy analyses conducted without this extensive margin feature might therefore lead to inaccurate policy prescriptions. In particular, the SDP model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by the standard time-dependent pricing (TDP) model.

Suggested Citation

  • Lie, Denny, 2020. "Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia," Working Papers 2020-08, University of Sydney, School of Economics, revised Feb 2021.
    • Handle: RePEc:syd:wpaper:2020-08
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    Cited by:

    1. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    2. Zams, Bastian Muzbar, 2021. "Frictions and empirical fit in a DSGE model for Indonesia," Economic Modelling, Elsevier, vol. 99(C).
    3. Solikin M. Juhro & Denny Lie & Aryo Sasongko, 2022. "An estimated open-economy DSGE model for the evaluation of central bank policy mix," Working Papers 2022-01, University of Sydney, School of Economics.

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    More about this item

    Keywords

    state-dependent pricing; monetary policy; DSGE model for Indonesia; COVID-19 pandemic;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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