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Policy evaluation with macroeconometric models

By Silvia Sgherri


This thesis presents a number of examples where macroeconometric models are employed as\ud useful tools for evaluation of contemporary policy problems. A range of approaches is\ud proposed to shed light on how macromodels can actually contribute to the policy debate. In\ud particular, the thesis emphasises how different models maybe augmented or modified and\ud stresses the need for care in the experimental design of policy simulations.\ud Small stylised models of the UK economy are estimated in the first part of this thesis. They are\ud used to assess the performance of simple monetary policy rules under the current inflation\ud targeting monetary regime. In a monetary policy regime of inflation targeting, the appropriate\ud target band-width can be assessed by calculating the variance of inflation in a macroeconomic\ud model under alternative policy rules. A recent Bank of England study concludes from\ud stochastic simulation of a small semi-structural model that a 'fairly substantial lump of\ud inflation uncertainty' exists in the United Kingdom. In chapter 2 an extended and improved\ud version of that model is developed while their estimates of inflation variability are revised\ud downwards by deploying analytic techniques. In chapter 3 a new small 'semi structural'\ud dynamic model of the UK economy is estimated, with particular attention to the modelling of\ud wages and prices. It is used to assess the performance of simple monetary policy rules,\ud including 'inflation forecast targeting' and 'Taylor' rules, while taking into account different\ud degrees of forward-lookingness in both inflation targeting horizon and wage bargaining.\ud Computation of asymptotic inflation-output standard-error trade-offs is provided under various\ud specifications and parametrisations of the model. Large-scale country models have the convenience to make explicit a complete range of\ud relationships among macroeconomic variables most of which, for obvious reasons, are\ud neglected in smaller dynamic models. As a consequence, such quantitative framework offers\ud an unique opportunity to evaluate not only the aggregate impact of exogenous shocks on the\ud variables of interest, but also to identify the underlying economic mechanisms enabling the\ud transmission of such shocks. In the second part of the thesis, I undertake simulations of the\ud National Institute's Domestic Econometric Model (NIDEM) to analyse the characteristics of\ud the UK monetary transmission mechanism. Chapter 4 emphasises that the impact of interest\ud rate movements on real variables is strictly determined by both the monetary regime at work\ud and the underlying assumptions regarding consumption behaviour.\ud Certainly, the steady integration of the members of the EMU and increasing awareness of the\ud need for closer co-operation in monetary and fiscal policy have stimulated greater interest in\ud modelling interdependencies between European countries and the impact and feedbacks from\ud the rest of the world economy. Many of the key issues have now an international aspect, so it\ud becomes more and more difficult to rely on single-country models to provide necessary\ud analysis. International transmission mechanisms can therefore be better tackled with a multi-country\ud model. The third and last part of this thesis focuses on cross-country asymmetric\ud transmissions in response to a common monetary shock within EMU. In particular, in chapter\ud 5 an empirical analysis of the links between monetary and fiscal policy within EMU is\ud presented. This is done through simulation of a neo-classical highly non-Ricardian multi-country\ud model: the IMF's MULTIMOD Mark III (MM3). Chapter 6 provides further evidence\ud about the effects of embracing a Monetary Union when underlying macroeconomist structures\ud still differ across countries. By use of the same model-based quantitative framework, this\ud chapter examines the role of nominal and real rigidities in European labour markets for the\ud assessment of asymmetries in monetary transmission under various monetary regimes

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