Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model

2016 ◽  
Vol 59 ◽  
pp. 546-569 ◽  
Author(s):  
Gunes Kamber ◽  
Chris McDonald ◽  
Nick Sander ◽  
Konstantinos Theodoridis
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Dsge Model ◽  
Reserve Bank ◽  
The Business Cycle

scholarly journals The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Phuong V. Nguyen
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Research Paper ◽  
New Keynesian ◽  
Dsge Model ◽  
Content Type ◽  
Business Cycle Fluctuations ◽  
Dynamic Stochastic ◽  
The Business Cycle

PurposeThe primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.Design/methodology/approachA SOE-NK-DSGE model—Bayesian estimation.FindingsThis paper analyzes the sources of the business cycle fluctuations in Vietnam.Originality/valueThis research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Search frictions and the business cycle in a small open economy DSGE model

2021 ◽  
Vol 39 ◽  
pp. 258-279
Author(s):  
Juan Guerra-Salas ◽  
Markus Kirchner ◽  
Rodrigo Tranamil-Vidal
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Search Frictions ◽  
Dsge Model ◽  
The Business Cycle

scholarly journals Trade in Commodities and Business Cycle Volatility

2021 ◽  
Vol 13 (3) ◽  
pp. 173-208
Author(s):  
David Kohn ◽  
Fernando Leibovici ◽  
Håkon Tretvoll
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Emerging Economies ◽  
Small Open Economy ◽  
Commodity Price ◽  
Cross Sectional ◽  
Developed Economies ◽  
Show Evidence ◽  
The Business Cycle ◽  
Sectoral Trade Flows

This paper studies the role of differences in the patterns of production and international trade on the business cycle volatility of emerging and developed economies. We study a multisector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional and time-series differences across countries. Emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to commodity price fluctuations. We show evidence consistent with this mechanism using cross-country data. (JEL E23, E32, F14, F41, F44)

scholarly journals Model identification, migration, and investment-specific shocks: Three essays

2021 ◽  
Author(s):  
◽  
Christopher Smith
Keyword(s):  
Human Capital ◽  
Business Cycle ◽  
Open Economy ◽  
Structural Parameters ◽  
Small Open Economy ◽  
Data Series ◽  
Prior Beliefs ◽  
Cyclical Fluctuations ◽  
Per Capita ◽  
The Business Cycle

<p>This thesis consists of an introduction and three substantive chapters. Chapter 2 explores the identification of a small open economy model. Chapter 3 focuses on the business cycle consequences of migration. And chapter 4 investigates the contribution of investment-specific technology shocks to business cycle fluctuations in the presence of financial frictions.  Chapter 2 takes a conventional new open economy macro model for a small open economy and addresses three questions: what data series should be used to identify the parameters of such a model? Are foreign data important for the identification of domestic parameters? And lastly, which structural parameters are interdependent?  The chapter illustrates an applied methodology that enables an investigator to understand which data series are informative about parameters. The methodology can also be used to learn about the properties of the model. In particular, the methodology highlights which parameters are connected to which data series. Identification of business cycle models matters because our ability to recover structural parameters is influenced by the data series that are used to inform the estimation. Structural parameters determine both the specification of household preferences and the constraints that affect business cycle volatility, which together determine welfare. Consequently, identification analysis can provide insights into household welfare, which in turn has ramifications for the specification of monetary policy rules.  If parameters are identified then the likelihood will eventually outweigh any prior beliefs as the sample size becomes large (Gelman et al., 2004, p. 107). The approach discussed here thus shows whether data will eventually dominate prior beliefs about parameters, determining whether analysis can – in the limit – resolve conflicting prior beliefs, and therefore usefully inform the design of policy rules.  Chapter 3 of this thesis examines the business cycle effects that arise from an expansion of the population due to migration. In recent years, migration flows have become a highly politicised topic, both in New Zealand and abroad. While the debate on migration has become heated, comparatively little is known about the business cycle consequences of migration flows.  This chapter contributes to the macroeconomic literature by illustrating the contribution that migration shocks make to cyclical fluctuations in New Zealand, and illustrates their dynamic impact. Using an estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy and a structural vector autoregression, the chapter shows that migration shocks account for a considerable portion of the variability of per capita gross domestic product (GDP). While migration shocks matter for the capital investment and consumption components of per capita GDP, other shocks are more important drivers of cyclical fluctuations in these aggregates. Migration shocks also make some contribution to residential investment and real house prices, but other shocks play a more substantial role in driving housing market volatility.  In the DSGE model, the level of human capital possessed by migrants relative to that of locals materially affects the business cycle impact of migration. The impact of migration shocks is larger when migrants have substantially different – larger or smaller – levels of human capital relative to locals. When the average migrant has higher levels of human capital than locals, as seems to be common for migrants into most OECD¹ economies, a migration shock has an expansionary effect on per capita GDP and its components, which also accords with the evidence from a structural vector autoregression.  Chapter 4 of this thesis investigates the contribution of investment-specific technology (IST) shocks in driving cyclical fluctuations in a closed economy model when a borrowing constraint is introduced à la Kiyotaki and Moore (1997). IST shocks have been identified as a major driver of the business cycle, eg see Greenwood et al. (2000), and Justiniano et al. (2010, 2011). These shocks affect the rate at which investment goods are transformed into capital stock, and have been linked to frictions in financial markets, because financial intermediation is instrumental in facilitating investment. The third chapter shows that the importance of these investment shocks is in fact substantially diminished when collateral constraints on firms are introduced into an estimated dynamic stochastic general equilibrium model. In the presence of binding collateral constraints, risk premium shocks, which perturb interest rates and affect intertemporal substitution, supplant IST shocks as important drivers of the business cycle.  ¹ Organisation for Economic Cooperation and Development.</p>

scholarly journals Model identification, migration, and investment-specific shocks: Three essays

2021 ◽  
Author(s):  
◽  
Christopher Smith
Keyword(s):  
Human Capital ◽  
Business Cycle ◽  
Open Economy ◽  
Structural Parameters ◽  
Small Open Economy ◽  
Data Series ◽  
Prior Beliefs ◽  
Cyclical Fluctuations ◽  
Per Capita ◽  
The Business Cycle

<p>This thesis consists of an introduction and three substantive chapters. Chapter 2 explores the identification of a small open economy model. Chapter 3 focuses on the business cycle consequences of migration. And chapter 4 investigates the contribution of investment-specific technology shocks to business cycle fluctuations in the presence of financial frictions.  Chapter 2 takes a conventional new open economy macro model for a small open economy and addresses three questions: what data series should be used to identify the parameters of such a model? Are foreign data important for the identification of domestic parameters? And lastly, which structural parameters are interdependent?  The chapter illustrates an applied methodology that enables an investigator to understand which data series are informative about parameters. The methodology can also be used to learn about the properties of the model. In particular, the methodology highlights which parameters are connected to which data series. Identification of business cycle models matters because our ability to recover structural parameters is influenced by the data series that are used to inform the estimation. Structural parameters determine both the specification of household preferences and the constraints that affect business cycle volatility, which together determine welfare. Consequently, identification analysis can provide insights into household welfare, which in turn has ramifications for the specification of monetary policy rules.  If parameters are identified then the likelihood will eventually outweigh any prior beliefs as the sample size becomes large (Gelman et al., 2004, p. 107). The approach discussed here thus shows whether data will eventually dominate prior beliefs about parameters, determining whether analysis can – in the limit – resolve conflicting prior beliefs, and therefore usefully inform the design of policy rules.  Chapter 3 of this thesis examines the business cycle effects that arise from an expansion of the population due to migration. In recent years, migration flows have become a highly politicised topic, both in New Zealand and abroad. While the debate on migration has become heated, comparatively little is known about the business cycle consequences of migration flows.  This chapter contributes to the macroeconomic literature by illustrating the contribution that migration shocks make to cyclical fluctuations in New Zealand, and illustrates their dynamic impact. Using an estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy and a structural vector autoregression, the chapter shows that migration shocks account for a considerable portion of the variability of per capita gross domestic product (GDP). While migration shocks matter for the capital investment and consumption components of per capita GDP, other shocks are more important drivers of cyclical fluctuations in these aggregates. Migration shocks also make some contribution to residential investment and real house prices, but other shocks play a more substantial role in driving housing market volatility.  In the DSGE model, the level of human capital possessed by migrants relative to that of locals materially affects the business cycle impact of migration. The impact of migration shocks is larger when migrants have substantially different – larger or smaller – levels of human capital relative to locals. When the average migrant has higher levels of human capital than locals, as seems to be common for migrants into most OECD¹ economies, a migration shock has an expansionary effect on per capita GDP and its components, which also accords with the evidence from a structural vector autoregression.  Chapter 4 of this thesis investigates the contribution of investment-specific technology (IST) shocks in driving cyclical fluctuations in a closed economy model when a borrowing constraint is introduced à la Kiyotaki and Moore (1997). IST shocks have been identified as a major driver of the business cycle, eg see Greenwood et al. (2000), and Justiniano et al. (2010, 2011). These shocks affect the rate at which investment goods are transformed into capital stock, and have been linked to frictions in financial markets, because financial intermediation is instrumental in facilitating investment. The third chapter shows that the importance of these investment shocks is in fact substantially diminished when collateral constraints on firms are introduced into an estimated dynamic stochastic general equilibrium model. In the presence of binding collateral constraints, risk premium shocks, which perturb interest rates and affect intertemporal substitution, supplant IST shocks as important drivers of the business cycle.  ¹ Organisation for Economic Cooperation and Development.</p>

A NOTE ON THE BUSINESS CYCLE IMPLICATIONS OF TRADE IN INTERMEDIATE GOODS

2013 ◽  
Vol 18 (5) ◽  
pp. 1172-1186 ◽  
Author(s):  
Aurélien Eyquem ◽  
Güneş Kamber
Keyword(s):  
Business Cycle ◽  
Open Economy ◽  
Small Open Economy ◽  
Intermediate Goods ◽  
Relative Prices ◽  
Cost Channel ◽  
The Business Cycle ◽  
Pass Through ◽  
Exchange Rate Pass Through ◽  
The Cost

Trade in intermediate goods is an important feature of trade in developed small open economies. We show that a model that assumes trade in intermediate goods brings the dynamics of an otherwise standard small open economy closer to what is observed in the data. With trade in intermediate goods, movements of international relative prices affect the economy through an additional channel, denoted the “cost channel.” A model embedding this channel comes closer to business cycle data in several dimensions compared to models with trade in final goods only. It increases the share of output variance explained by foreign shocks, lowers the exchange rate pass-through, and delivers a positive international correlation of outputs. In addition, the matching of other business cycle moments is at least as good as in a model with trade in final goods only.

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