Macroeconomic Models and Stabilization Policy

International Journal of Academic Research in Accounting, Finance and Management Sciences, 2019

In the study of macroeconomic models, we mainly start from a basic model, which explains the correlations that are established between the economic variables and the proportions that must exist between them, so that a balanced evolution can be achieved, which has the effect of at the macroeconomic level. The balance is not maintained automatically and therefore some measures must be taken to ensure the return of production to an appropriate level characterized by stability. Normally, unemployment is a balancing element in the sense that, when production is realized above market demands, a restructuring of the workforce is needed. This can be done through professional conversion or through unemployment. The issue regarding what is more advantageous, the production of unsold stocks at the level of the national economy or in a certain field, or the cessation of its production, with the effect of passing a number of employees into unemployment, must be addressed. Also, another element that causes distortions in maintaining the balance, which we find in the basic model, is that of inflation. Inflation, as opposed to deflation, is a factor that influences consumption and at the same time influences investment. Consumption is influenced in the sense that if inflation is very high, prices increase and then consumption is reduced. But all inflation causes a part of the monetary mass to be released and thus to return to the equilibrium element. Liquidity must be correlated with inflation and the mechanism of inflation.

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Methodologies for analyzing the forces that move and shape national economies have advanced markedly in the last thirty years, enabling economists as never before to unite theoretical and empirical research and align measurement with theory. In Structural Macroeconometrics, David DeJong and Chetan Dave provide the unified overview and in-depth treatment analysts need to apply these latest theoretical models and empirical

MIMAP Research Paper, 1996

Structural adjustments such as trade liberalization, financial liberalization, and the like, are used to address both efficiency and production-related problems in the economy. Stabilization policies such as tight money and fiscal restraint, on the other hand, are used to reduce aggregate demand so as to reduce inflationary pressures and therefore stabilize the economy.

Central Bank of Malta Working Paper, 2013

This paper presents a structural macro-econometric model of the Maltese economy developed at the Modelling & Research Office of the Central Bank of Malta during 2012. This model is small-scale, consisting of 19 behavioural equations (estimated on quarterly data from 2000 to 2011) and 130 identities. There are 33 exogenous variables, mostly economic variables for trading partners, commodity prices, demographic developments and fiscal variables. The model is built around the neoclassical synthesis, with sluggish adjustment of wages and prices in the short run and also some inertia of real variables in response to shocks. Economic agents are assumed to have adaptive expectations. There are four blocks in the model. The supply block is composed of a Cobb-Douglas production function and a demand for labour equation. The aggregate demand block has six behavioural equations explaining the components of real GDP. The wage/price block includes four equations for the aggregate demand components of real GDP, a private wage function and a house price equation. The financial block models consumer credit and mortgage credit, with three other equations determining the pass-through of the policy rate to lending rates. This paper also presents the economic impact of four simulated shocks: an increase in the policy rate, a rise in oil prices, an appreciation of the euro against the US dollar and higher world demand. The simulations confirm that the impact of monetary policy is weak in Malta while that of a change in foreign demand is quite strong. The exposure of the Maltese economy to shocks in oil prices and in the value of the US dollar also appears to be relatively significant. This paper is meant to constitute an intermediate stage in the structural model’s development. In future there will be further refinements, such as an enhanced integration of the supply side, the inclusion of an endogenous fiscal block, a more detailed financial block and further sectorial disaggregation.

2005

Dlsu Business & Economics Review, 2014

I use Bayesian methods to estimate a medium-scale closed economy dynamic stochastic general equilibrium (DSGE) model for the Philippine economy. Bayesian model selection techniques indicate that among the frictions introduced in the model, the investment adjustment costs, habit formation, and the price and wage rigidity features are important in capturing the dynamics of the data, while the variable capital utilization, fixed costs, and the price and wage indexation features are not important. I find that the Philippine macroeconomy is characterized by more instability than the U.S. economy. An analysis of the several subperiods in Philippine economic history also reveals some quantitative evidence that risk aversion increases during crisis periods. Also, I find that the inflation targeting (IT) era is associated with a more stable economy: the standard deviations of the technology shock, the risk-premium shock, and the investment-specific technology shock have significantly lower variability than the pre-IT era. Shock decomposition analysis also reveals that BSP's conduct of monetary policy appears to be more procyclical than countercyclical, for example, during the recent global financial and economic crisis.