Posted

September 25, 2010 12:18:38 AM

Date

2007-08

Author

Jaromir Benes, Marta Castello Branco, David Vavra

Affiliation

Reserve Bank of New Zealand, IMF

Title

A Simple DGE Model for Inflation Targeting

Summary /
Abstract

The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.

Keywords

Inflation targeting, Economic models, Monetary transmission mechanism

URL

http://www.imf.org/external/pubs/ft/wp/2007/wp07197.pdf

Remarks

This is an applied DSGE model for Turkey, a country that became a full-fledged IT in 2006. A very practical, monetary policy-oriented paper.

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