Implementing the New Structural Model of the Czech National Bank

The purpose of the paper is to introduce the new “g3†structural model of the Czech National Bank and illustrate how it is used for forecasting and policy analysis. As from January 2007 the model was regularly used for shadowing official forecasts, and in July 2008 it became the core model of the CNB. In the paper we highlight the most important and unusual features of the model and discuss tools and procedures that help us in forecasting and assessing the economy with the model. The paper is not meant to provide a full derivation of the model or the complete characteristics of its behavior and should not be regarded as model documentation. Rather, the paper demonstrates how the model is used and how it contributes to policy analysis.DSGE, filtering, forecasting, general equilibrium, monetary policy.

Pruning and Higher-Order Perturbation Solutions

Abstract This paper evaluates the pruning procedure proposed by correspondences. An accuracy procedure is proposed to evaluate the severity of the exposed disadvantages of pruning for the problem at hand. A simple alternative to pruning is proposed

Why is Canada's Price Level so Predictable?

One of the pioneers of inflation targeting (IT), the Bank of Canada is now considering a possibility of switching to price-level-path targeting (PLPT), where past deviations of inflation from the target would have to be offset in the future, bringing the price level back to a predetermined path. This paper draws attention to the fact that the price level in Canada has strayed little from the path implied by the two percent inflation target since its introduction in December 1994, and has tended to revert to that path after temporary deviations. Econometric analysis using Bayesian estimation suggests that a low probability can be assigned to explaining this behavior by sheer luck manifesting itself in mutually offsetting shocks. Much more plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of PLPT. This suggests that the difference between IT as it is actually practiced (or perceived) and PLPT may be less stark than what pure theoretical constructs posit, and that the transition to a fullfledged PLPT regime will likely be considerably easier than what was previously thought. The paper also shows that inflation expectations are a major driver of actual inflation in Canada, which makes it easier to keep inflation close to the target without large output costs.Inflation targeting;Prices;Interest rates;Price stabilization;inflation, price level, monetary policy, real interest rate, nominal interest rate, inflation rate, central bank, inflation target, average inflation, price stability, monetary fund, percent inflation, distribution of inflation, actual inflation, monetary policy reaction function, rate of inflation, monetary authority, inflationary shock, national bank, percent inflation rate, inflation equation, lower inflation, deflationary shock, inflation process, monetary transmission mechanism, monetary policy regime, optimal monetary policy, inflationary expectations, inflation-targeting, monetary policy rule, monetary transmission

Constructing Forecast Confidence Bands During the Financial Crisis

We derive forecast confidence bands using a Global Projection Model covering the United States, the euro area, and Japan. In the model, the price of oil is a stochastic process, interest rates have a zero floor, and bank lending tightening affects the United States. To calculate confidence intervals that respect the zero interest rate floor, we employ Latin hypercube sampling. Derived confidence bands suggest non-negligible risks that U.S. interest rates might stay near zero for an extended period, and that severe credit conditions might persist.Bank credit;Credit restraint;Economic forecasting;Economic models;European Union;Inflation targeting;Interest rates;Oil prices;inflation, equation, monetary policy, confidence interval, confidence intervals, inflation rate, samples, covariance, rate of inflation, sampling, real interest rate, survey, stochastic processes, forecasting, equations, price level, nominal interest rate, random walk, stochastic process, sampling technique, logarithm, real variables, statistics, rate of change, low rate of inflation, relative price, central tendency, time series, predictions, gaussian distribution, inflation equation, real exchange rates, covariances, annual inflation rate, correlation, numerical integration, probability, empirical estimation, monetary economics, real interest rates, annual inflation

A Model for Full-Fledged Inflation Targeting and Application to Ghana

A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.Disinflation;Economic models;External shocks;Inflation rates;Inflation targeting;Low-income developing countries;inflation, monetary policy, central bank, low inflation, inflation rate, inflation target, increase in inflation, real interest rate, expectations of inflation, monetary fund, national bank, inflation objective, foreign exchange, high inflation, annual inflation, aggregate demand, rate of inflation, real interest rates, monetary economics, price level, actual inflation, monetary authorities, optimal monetary policy, inflationary consequences, inflation process, inflation forecasts, monetary policy transparency, variable inflation, lower inflation, effects of inflation, monetary policy instrument, monetary instrument, inflation dynamics, inflationary pressures, percent inflation, increase in interest rates, monetary policy decision, inflationary spiral, tight monetary policy

How well-behaved are higher-order perturbation solutions?” Working Paper

Abstract They are not well-behaved. The main problem is that one cannot control the radius of convergence when using perturbation techniques. Just outside the radius of convergence, higher-order approximations can easily behave extremely badly, and even within the radius of convergence one can expect higher-but …nite-order perturbation solutions to display problematic oscillations. In contrast, with projection methods one can control the radius of convergence. Pruning, the solution proposed to deal with explosive behavior of higher-order perturbation solutions, is shown to be highly distortionary. A simple alternative based on short samples and rejection sampling is proposed and shown to be much less distortive

A Small Quarterly Projection Model of the US Economy

This is the first of a series of papers that are being written as part of a project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the U.S. economy. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. After developing a benchmark model without financial-real linkages, we introduce such linkages into the model and compare the results with and without linkages.Monetary policy;Economic forecasting;Forecasting models;inflation, equation, correlation, forecasting, standard deviation, real interest rate, inflation equation, equations, rate of inflation, survey, correlations, inflationary pressures, nominal interest rate, time series, aggregate demand, stochastic processes, samples, standard deviations, real interest rates, increase in inflation, calibration, rates of inflation, maximum likelihood estimation, simultaneous equation, rational expectations, inflation target, integral, price level, standard errors, relative prices, sample size, inflation rate, increase in interest rates, nominal interest rates, inflation process, monetary economics, price deflation, random walk

A Small Quarterly Multi-Country Projection Model

This is the second of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies. The model is estimated with Bayesian techniques, which provide a very efficient way of imposing restrictions to produce both plausible dynamics and sensible forecasting properties. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook.Monetary policy;Economic forecasting;Forecasting models;inflation, equation, forecasting, correlations, equations, real interest rate, correlation, standard deviation, aggregate demand, survey, rate of inflation, nominal interest rate, real interest rates, time series, standard deviations, price level, inflationary pressures, stochastic processes, real exchange rates, inflation equation, confidence intervals, rate of change, inflation rates, calibration, high inflation, rates of inflation, monetary economics, inflation target, samples, rational expectations, effective exchange rates, rise in inflation, simultaneous equation, real output, integral, relative prices, projection period, nominal interest rates, increase in inflation, random walk, inflation rate, measure of inflation, inflation process, increase in interest rates