SOEPL 2009 – An Estimated Dynamic Stochastic General Equilibrium Model for Policy Analysis And Forecasting

The paper documents elements of work on the dynamic stochastic general equilibrium (DSGE) SOEPL model that has been carried out in recent years at the National Bank of Poland. In 2009 a new version of the model was developed (called SOEPL−2009) which in 2010 is to support an econometric model and experts’ forecasts in mid-term forecasting of inflation and economic activity. The paper consists of three basic parts. The first part is introductory and briefly outlines the development of macroeconometric methods which brought about the creation of new-keynesian models specified within the dynamic stochastic general equilibrium approach. The remaining two parts of the paper report specification, estimation results and some properties of the SOEPL−2009 DSGE model.

Skew-normal shocks in the linear state space form DSGE model

Observed macroeconomic data – notably GDP growth rate, inflation and interest rates – can be, and usually are skewed. Economists attempt to fit models to data by matching first and second moments or co-moments, but skewness is usually neglected. It is so probably because skewness cannot appear in linear (or linearized) models with Gaussian shocks, and shocks are usually assumed to be Gaussian. Skewness requires non-linearities or non-Gaussian shocks. In this paper we introduce skewness into the DSGE framework assuming skewed normal distribution for shocks while keeping the model linear (or linearized). We argue that such a skewness can be perceived as structural, since it concerns the nature of structural shocks. Importantly, the skewed normal distribution nests the normal one, so that skewness is not assumed, but only allowed for. We derive elementary facts about skewness propagation in the state space model and, using the well-known Lubik-Schorfheide model, we run simulations to investigate how skewness propagates from shocks to observables in a standard DSGE model. We also assess properties of an ad hoc two-steps estimator of models’ parameters, shocks’ skewness parameters among them.

Forecasting the Polish zloty with non-linear models

The literature on exchange rate forecasting is vast. Many researchers have tested whether implications of theoretical economic models or the use of advanced econometric techniques can help explain future movements in exchange rates. The results of the empirical studies for major world currencies show that forecasts from a naive random walk tend to be comparable or even better than forecasts from more sophisticated models. In the case of the Polish zloty, the discussion in the literature on exchange rate forecasting is scarce. This article fills this gap by testing whether non-linear time series models are able to generate forecasts for the nominal exchange rate of the Polish zloty that are more accurate than forecasts from a random walk. Our results confirm the main findings from the literature, namely that it is difficult to outperform a naive random walk in exchange rate forecasting contest.Exchange rate forecasting; Polish zloty; Markov-switching models; Artificial neural networks

Forecasting the Polish Zloty with Non-Linear Models

The literature on exchange rate forecasting is vast. Many researchers have tested whether implications of theoretical economic models or the use of advanced econometric techniques can help explain future movements in exchange rates. The results of the empirical studies for major world currencies show that forecasts from a naive random walk tend to be comparable or even better than forecasts from more sophisticated models. In the case of the Polish zloty, the discussion in the literature on exchange rate forecasting is scarce. This article fills this gap by testing whether non-linear time series models are able to generate forecasts for the nominal exchange rate of the Polish zloty that are more accurate than forecasts from a random walk. Our results confirm the main findings from the literature, namely that it is dificult to outperform a naive random walk in exchange rate forecasting contest.exchange rate forecasting, Polish zloty, Markov-switching models, artificial neural networks

Shocks and rigidities as determinants of CEE labor markets' performance. A panel SVECM approach

In this paper the dynamic responses of labor markets to macroeconomic shocks in eight CEE countries are empirically analyzed in panel SVECM. Identification of shocks, interpreted as real wage, productivity, labor demand and supply shocks, is based on DSGE model with labor market explicitly modeled after Mortensen and Pissarides (1994). Fluctuations in foreign demand are controlled for and the model is estimated with panel procedure, which improves estimation's precision. We show that propagation of shocks on NMS labor markets fairly resembles that characterizing OECD countries. Productivity improving shocks temporarily increase unemployment. Positive labor demand shocks increase employment, depress unemployment, rise real average wages, and were found to be the main determinant of variability of employment and unemployment in the short-run. In the medium term, in Czech Republic, Latvia, Lithuania and Poland innovations in wages seem to be prevalent drivers of employment and unemployment. The retrospective simulations of the model show that Baltic states and Poland were significantly affected by the collapse of Russian exports in late 1990s, and in 2000 an adverse labor demand shock hit all NMS, except for Hungary and Slovenia. However, the flexibility of wages is found to be crucial factor behind the diverse labor market performance in the region. Slovenia and Estonia fared best when it comes to flexibility of wages on macro level, on the other hand in Czech Republic, Lithuania and Poland downward wage rigidities were especially binding after employment-contracting shocks.Unemployment; Rigidities; Transition economies; Cointegration,;Structural VECM; Panel econometrics; DSGE models

Plausibility of big shocks within a linear state space setting with skewness

In this paper we provide formulae for likelihood function, filtration densities and prediction densities of a linear state space model in which shocks are allowed to be skewed. In particular we work with the closed skew normal distribution, see González-Farías et al. (2004), which nests a normal distribution as a special case. Closure of the csn distribution with respect to all necessary transformations in the state space setting is guaranteed by a simple state dimension reduction procedure which does not influence the value of the likelihood function. Presented formulae allow for estimation, filtration and prediction of vector autoregressions and first order perturbations of DSGE models with skewed shocks. This allows to assess asymmetries in shocks, observed data, impulse responses and forecasts confidence intervals. Some of the advantages of using the outlined approach may involve capturing asymmetric inflation risks in central banks forecasts or producing more plausible probabilities of deep but rare recessionary episodes with DSGE/VAR filtration. Exemplary estimation results are provided which show that within a linear setting with skewness frequency of big shocks can be rather plausibly identifed

Monetary policy in a non-representative agent economy: A survey

It is well-known that central bank policies affect not only macroeconomic aggregates, but also their distribution across economic agents. Similarly, a number of papers demonstrated that heterogeneity of agents may matter for the transmission of monetary policy on macro variables. Despite this, the mainstream monetary economics literature has so far been dominated by dynamic stochastic general equilibrium (DSGE) models with representative agents. This article aims to tilt this imbalance towards heterogeneous agents setups by surveying the main positive and normative findings of this line of the literature, and suggesting areas in which these models could be implemented. In particular, we review studies that analyze the heterogeneity of (i) households’ income, (ii) households’ preferences, (iii) consumers’ age, (iv) expectations, and (v) firms’ productivity and financial position. We highlight the results on issues that, by construction, cannot be investigated in a representative agent framework and discuss important papers modifying the findings from the representative agent literature.Heterogeneous Agents; Monetary Policy

Shocks and rigidities as determinants of CEE labor markets' performance. A panel SVECM approach

In this paper the dynamic responses of labor markets to macroeconomic shocks in eight CEE countries are empirically analyzed in panel SVECM. Identification of shocks, interpreted as real wage, productivity, labor demand and supply shocks, is based on DSGE model with labor market explicitly modeled after Mortensen and Pissarides (1994). Fluctuations in foreign demand are controlled for and the model is estimated with panel procedure, which improves estimation's precision. We show that propagation of shocks on NMS labor markets fairly resembles that characterizing OECD countries. Productivity improving shocks temporarily increase unemployment. Positive labor demand shocks increase employment, depress unemployment, rise real average wages, and were found to be the main determinant of variability of employment and unemployment in the short-run. In the medium term, in Czech Republic, Latvia, Lithuania and Poland innovations in wages seem to be prevalent drivers of employment and unemployment. The retrospective simulations of the model show that Baltic states and Poland were significantly affected by the collapse of Russian exports in late 1990s, and in 2000 an adverse labor demand shock hit all NMS, except for Hungary and Slovenia. However, the flexibility of wages is found to be crucial factor behind the diverse labor market performance in the region. Slovenia and Estonia fared best when it comes to flexibility of wages on macro level, on the other hand in Czech Republic, Lithuania and Poland downward wage rigidities were especially binding after employment-contracting shocks

Shocks and rigidities as determinants of CEE labor markets' performance. A panel SVECM approach

In this paper the dynamic responses of labor markets to macroeconomic shocks in eight CEE countries are empirically analyzed in panel SVECM. Identification of shocks, interpreted as real wage, productivity, labor demand and supply shocks, is based on DSGE model with labor market explicitly modeled after Mortensen and Pissarides (1994). Fluctuations in foreign demand are controlled for and the model is estimated with panel procedure, which improves estimation's precision. We show that propagation of shocks on NMS labor markets fairly resembles that characterizing OECD countries. Productivity improving shocks temporarily increase unemployment. Positive labor demand shocks increase employment, depress unemployment, rise real average wages, and were found to be the main determinant of variability of employment and unemployment in the short-run. In the medium term, in Czech Republic, Latvia, Lithuania and Poland innovations in wages seem to be prevalent drivers of employment and unemployment. The retrospective simulations of the model show that Baltic states and Poland were significantly affected by the collapse of Russian exports in late 1990s, and in 2000 an adverse labor demand shock hit all NMS, except for Hungary and Slovenia. However, the flexibility of wages is found to be crucial factor behind the diverse labor market performance in the region. Slovenia and Estonia fared best when it comes to flexibility of wages on macro level, on the other hand in Czech Republic, Lithuania and Poland downward wage rigidities were especially binding after employment-contracting shocks

Employment in Poland 2007: Security on flexible labour market

This Report is a third in the series Employment in Poland. It consists of four Parts, devoted to empirical analysis of the impact of macroeconomic shocks on EU New Member States labour markets‘ in 1996-2006; utilization of flexible forms of employment on Polish labor market, determinants of wages and wage inequalities in Poland; effectiveness of ALMP in Poland, respectively. In Part I, we present how the cyclical upturn propagated on Polish labour market in 2003-2007 and how the performance of that market evolved relatively to other EU countries. Then we apply a panel SVECM to study propagation of macroeconomic shocks in eight CEE countries which joined the EU in 2004. We show that demand side shocks (foreign demand and labour demand shocks) were of foremost importance to unemployment and employment fluctuations in the region. At the same time, we argue that the wage shocks, thought of as wage rigidities, were important internal disturbances affecting the developments on the labour markets in the region. Part II is devoted to atypical forms of labour employment. We show that in all CEE countries the incidence of nonstandard employment arrangements is much lower than in Western Europe. Although Poland stands out in the whole EU with its dynamic spread of temporary employment and integration of temporary work agencies in the functioning of the labour market, in general the potential of atypical employment in Poland and other CEE is largely unfulfilled when it comes to work- life balance or supporting the economic activity of people who find it difficult to work full-time due to age or health reasons. In case of Poland, we study in more detailed way the legal, infrastructural and tax-related factors affecting the utilisation of nonstandard forms of employment. In Part III, we study wage developments in Poland from macro- and micro-perspective alike. We argue that wage growth in Poland exhibited a significant inertia during the transition period. We find that the concurrent rise of wage inequalities in Poland was due to the fact that rapid technological progress favoured some professional and social groups more than others. The increasing return on formal education and rising premiums on work in managerial positions as well as increasingly diverse individual and market characteristics of Polish workers seem to play the key role. The public sector stands out with higher wage compression than private sector. We show also that, in international comparison, the gender wage gap in Poland is relatively small. Notwithstanding the above, even if differences in individual and employer characteristics as well as working time are taken into consideration, women still earn about ten percent less than men. Part IV focuses active labour market policies (ALMP). We assess the ALMP spending and structure in Poland and we use the survey, conducted for the purposes of this Report, to study to effectiveness of ALMP. To our knowledge, it is the first attempt at producing a rigorous and comprehensive evaluation of ALMP effectiveness in Poland in the recent years. Applying Propensity Score Matching, we find that intervention and public works turn out to be completely inefficient when it comes to enhancing employment chances of the unemployed. At the same time, even for those programs that are characterised by positive net efficiency, such as internships and traineeships, the deadweight loss is also high, i.e. support is extended to groups whose situation is relatively good, whereas more difficult cases are neglected. Thus, the placement of ALMP participants in Poland is sub-optimal, which partly reflects very poor job broking and counseling done by PES. We complete the report with policy implications