medium–term forecasting model
DESCRIPTION
Medium–term forecasting model. Jan Vlček Economic Modeling Division [email protected]. OVERVIEW. medium term forecast (MTF) and the model structure of Quarterly Projection Model (QPM) responses to typical shocks. MTF - Role of the model. - PowerPoint PPT PresentationTRANSCRIPT
OVERVIEW
• medium term forecast (MTF) and the model
• structure of Quarterly Projection Model (QPM)
• responses to typical shocks
MTF - Role of the model• designed to describe interaction of key macro-
variables over medium term horizon• provide high level description of forward looking
transmission mechanism• what needs to be done to respect the inflation
target• provide consistency check on judgements and
dynamic of medium term scenario• does not produce forecast - macro models have
never been good at forecasting• it‘s staff projection
MTF - Role of the model
• simulation tool• provide substantial help on dealing with risks and
uncertainty• organizing and disciplining device• comfort in communication• consistency enhance credibility in communication• research tool• model is not designed to reproduce economy in literal
sense - two types of model - adaptation process- rates and exchange rate endogenous
MTF - Requirements on model• model has to embody a view on transmission (how
monetary policy works, focus debate)• good forecasting tool in medium term horizon• MPC must view model as reflecting the world
they deal with• structural approach with economic foundations -
two types of model• open architecture => ability to incorporate (expert)
information from outside the model framework• core model + satellite model tools
MTF - What model needs
What we need for model construction• idea about transmission• estimation and calibration• staff and FPAS• near term forecast
Structure of QPM
• simple first generation model - key flows• gap model - study the dynamic properties around
equilibrium values• semi structural model - equations depict behavior of
agent in various markets• no supply side, stocks and assets equilibrium, no
stock-flow model• estimation and calibration driven by overall model
properties
Structure of QPM
Why we start with this first generation model:• insufficient data and experience• participation and communication• little experience with FPAS• the first step on the long way
Structure of QPM• basic logic:
– come from model’s purpose– theory of monetary cycle => gap model– two separate blocks
• block of long run equilibrium trends
• block of cyclical fluctuations
• blocks are irreplaceable, they enable us to isolate the key mechanism
Cyclical part of QPMRequirements for the cyclical block:
– cyclical part should capture characteristics of Czech economy
– IT regime
– forward looking transmission mechanism
– systematic reaction of interest rate to future inflation deviation from target - focus on medium term deviations
– floating exchange rate - endogenous variable
Main cyclical mechanisms in QPM
• interaction of supply and demand on markets• inter and intra temporal substitution• behavior of agent influenced by expectations with
forward looking component• monetary nature of business cycle:
– wage stickiness
– final price stickiness
– expectation stickiness
Key equations in QPM
Crucial parts of QPM• aggregate demand• aggregate supply• exchange rate equation• monetary rule
Output gap
Persistence
Deviations of real
interest rate
Deviation of real
exchange rate
Potential output
Output gap
GDP
Backward
expectations
Intra temporal
substitution
International
substitution
Foreign output gap
Output gap
y_gapt
*t11t1t0t ____ gapydgaprmcigapydgapy
t2*t5t431t z_gaprr4_gapbrr4_gapc_rmci_gap bbgaprbb t
Inflation
Core inflation
excluding food
Inflation of food
prices
Inflation of
regulated prices
Core
inflation
Inflation
of headline CPIEnergy prices
inflation
Core inflation ex. foodForward
looking
Backward
looking
Imported
inflation
Relative price
movements
Business cycle
Persistence
Behavioral
components
Core Inflation
ex. food
Core inflation ex. food
xcore
tt
tttMtt
gapya
xcoreaEaeqzaxcore_
13
12110
_
...___
1210 aaa
Inflation of food pricesForward
looking
Backward
looking
Imported
inflation
Business cycle
Persistence
Behavioral
components
Food prices
Inflation
Inflation of food prices
food_13
12110
_
...food_food_
tt
ttMFtt
gapyg
gEgg
1210 ggg
Nominal exchange rateExpectational form of UIP
Forward
looking
Backward
looking
Expectations
Interest rate
differential
Nominal exchange
rate
Nominal exchange rate
stt
tt
tttttt
premii
eqzsgsg
44
..._2)(2)1(s*
*111010
Interest Rate Rule
3 Month interest
rate
Policy neutral
level of i.r.
Persistence
Reaction
to business cycle
Inflation
expectations
Equilibrium
real rate
Output
gap
Expected
deviation
from target
Interest Rate Rule
itttt rsrsrs t_eq)(11
4
target44
__
_)(
ttt
tttt
eqrreqrs
gapyE
Model properties - Calibration versus Estimation
• calibrated model, partially estimated• problems with estimation
– short data sample
– it is not possible to estimate some parameters
• calibration - parameters set on the basis of model properties– restriction from economic theory
– responses on typical shocks
Model properties - Calibration versus Estimation
• adaptive strategy• econometric estimates - limiting guidance• parameters come from theory and behavior in
responses
Verification• within sample simulation• ‘curve fitting’ estimates
Model properties
properties given by:– model structure– parameters– reaction function
verify model properties:– reaction on all possible shocks
– simulation experiments
Shock I
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.8
-0.6
-0.4
-0.2
0Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.4
-0.3
-0.2
-0.1
0
0.1
Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.5
0
0.5Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1.5
-1
-0.5
0
0.5
1
1.5
Grow Rate of Exchange Rate Inflaton of Import Prices
Shock II
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.1
0
0.1
0.2
0.3Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.5
0
0.5
1Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.2
0
0.2
0.4
0.6Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.5
0
0.5
1 Grow Rate of Exchange Rate Inflaton of Import Prices
Shock III
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.4
-0.3
-0.2
-0.1
0
Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.2
-0.1
0
0.1
0.2Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.6
-0.4
-0.2
0
0.2Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.5
0
0.5
1
1.5Grow Rate of Exchange Rate Inflaton of Import Prices
Shock IV
2003Q2 2005Q2 2007Q2 2009Q2 2011Q20
0.1
0.2
0.3
0.4
0.5Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.2
-0.1
0
0.1
0.2Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.2
0
0.2
0.4
0.6Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.5
0
0.5Grow Rate of Exchange Rate Inflaton of Import Prices
Delayed Policy Response
2003Q2 2005Q2 2007Q2 2009Q2 2011Q20
0.2
0.4
0.6
0.8
1Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.5
0
0.5
1Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.5
0
0.5
1
1.5Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1.5
-1
-0.5
0
0.5
1
1.5Grow Rate of Exchange Rate Inflaton of Import Prices
Policy shock
2003Q2 2005Q2 2007Q2 2009Q2 2011Q20
0.05
0.1
0.15
0.2Inflation y-o-y
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.2
-0.1
0
0.1
0.2
0.3Output GapRMCI Index
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-1
-0.5
0
0.5Nominal Short Interest RateReal Long Interest Rate
2003Q2 2005Q2 2007Q2 2009Q2 2011Q2-0.4
-0.2
0
0.2
0.4Grow Rate of Exchange Rate Inflaton of Import Prices
Way ahead - 1st, 2nd and 3rd Model Generation
• First Generation model– simple gaps model of transmission– emphasize on expectations– insight on the role of monetary policy– starting point, but with useful insights
• Second Generation model– C, I, G, X, Q– supply side with stock-flow accounting
• Third Generation model– multi sector– fully based on dynamic optimization theory
Thank you for your attention