An Estimated DSGE Model for Integrated Policy Analysis

By Kaili Chen, Marcin Kolasa, Jesper Lindé, Hou Wang, Pawel Zabczyk, Jianping Zhou

June 30, 2023

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Kaili Chen, Marcin Kolasa, Jesper Lindé, Hou Wang, Pawel Zabczyk, and Jianping Zhou. An Estimated DSGE Model for Integrated Policy Analysis, (USA: International Monetary Fund, 2023) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.

Subject: Currency markets, Exchange rate adjustments, Exchange rates, Financial markets, Foreign exchange, Foreign exchange intervention, Inflation, Prices

Keywords: Bayesian Estimation, Currency markets, Emerging Markets, Endogenous Risks, Exchange rate adjustments, Exchange rates, Foreign Exchange Intervention, FX market depth, FXI rule, FXIS impact transmission, Global, Incomplete Financial Markets, Inflation, Integrated Policy Framework, Investors portfolio outflow, Monetary Policy, Outflow shock

Publication Details

Pages:

65
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/135
Stock No:

WPIEA2023135
ISBN:

9798400245763
ISSN:

1018-5941

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