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A Panel Discussion on

A Panel Discussion on DSGE Modelling at Central Banks: Country Practices and How It Is Used in Policy Making by Surach Tanboon Monetary Policy Department Bank of Thailand

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A Panel Discussion on

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  1. A Panel Discussion on DSGE Modelling at Central Banks:Country Practices and How It Is Used in Policy Making by Surach Tanboon Monetary Policy DepartmentBank of Thailand Presented at the SEACEN-CCBS/BOE-BSP Workshop onDynamic Stochastic General Equilibrium Modeling and Econometric Techniques November 23–27, 2009 Manila, Philippines

  2. Macro Modeling at Bank of Thailand 2 2 2 2 • Bank of Thailand Macroeconometric Model (BOTMM) • Principal model for forecasting and policy analysis • Small New-Keynesian Model • Used in policy analysis • DSGE Model • Work in progress, currently used to study special issues • Aimed to complement BOTMM in MPC process

  3. 3 Model Environment FEATURES AGENT FUNCTIONS • Consume • Consumption habit persistence • Deposit funds with banks;trade foreign bonds • Debt-contingent premium on foreign borrowing Households • Supply labor to firms and set wage • Monopolistic competitive labor market; wage rigidities Export Firms • Competitive export market • Monopolistic competitive local market; price rigidity • Hire inputs and produce Domestic Firms • External finance premium Capital Producer • Invest and supply capital to firms • Investment adjustment costs • External finance premium • Take deposits from households;lend to firms Banks Government • Fixed proportion of nominal GDP • Spend according to fiscal rule • Set interest rate according to monetary policy rule • Inflation targeting Central Bank

  4. 4 4 4 4 4 4 Macro-financial linkage With Financial Accelerator No Financial Accelerator BALANCESHEET Banks labor labor EXTERNAL FINANCE: deposits EXTERNAL FINANCE: loans BALANCESHEET Households Firms Firms Households capital Capital producer capital Capital producer final good(for investment) Retailers Key Mechanism Inverse relationship between borrower’s balance sheetconditions andpremium for external finance final good(for consumption) wholesale good

  5. Determination of RD 5 5 5 5 Model Highlight 1: Double financial accelerator Case 1 QKD < ND • No need to seek external finance;External finance premium is zero Case2 ND < QKD < ND + NBD • Firm needs to borrow & bank can cover firm’s demand with its own internal funds • Case 3QKD > ND + NBD • Bank cannot cover firm’s demand;pays premium when raise external funds; in turn passes this premium onto firms Source: Sunirand (2002)

  6. 6 6 6 6 Model Highlight 2: Euler rate puzzle • Canzoneri, Cumby, and Diba (2007) and Reynard and Schabert (2009) • Euler rate is empirically not related to observed policy rates • Here, bank’s external finance premium acts as wedge between policy rate and deposit rate • Hence interest rate at which households use for discountingis different from Euler rate

  7. 7 7 7 7 • Model insight: Higher degree of monetary policy accommodationduring crisis times Equity shock Financial accelerator intensified: external finance premium becomes more sensitive to balance sheet conditions

  8. Plan Ahead 8 8 8 8 • Start inducting DSGE model in MPC process • Policy analysis • Forecasting • Issues to work out • Estimating the model • Striking balance between simplicity and complexity • Communication between modelers and policymakers/sector specialists • Dealing with nonmodeled variables • Incorporating off-model information • Large cross-section data, high-frequency indicators, judgment • Introducing risks and uncertainty in model

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