A Simple DGE Model for Inflation Targeting

August 1, 2007

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Format: Chicago

A Simple DGE Model for Inflation Targeting, (USA: International Monetary Fund, 2007) accessed November 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper presents a DGE model designed as a core projection tool to support monetary policy in inflation-targeting (IT) emerging market economies. The paper uses a particularly simple and flexible general equilibrium model structure that can be amended to account for various phenomena that often complicate policy analysis in emerging markets, such as persistent trends in relative prices. The model's calibration is intuitive and can draw on the vast experience many countries have with calibrating small 'gap' models of monetary policy transmission. Moreover, the definition of the model's steady state in terms of nominal expenditure ratios, rather than levels of real variables, allows for the easy use of the model in a regular forecast production cycle in an IT central bank. The paper tests the model's properties on recent Turkish data, demonstrating that the main stylized features relevant for monetary policy making are well captured by the model.

Subject: Consumption, Exchange rates, Inflation, Inflation targeting, Real exchange rates

Keywords: Business cycle, Nominal exchange rate, Risk premium, Terms of trade, WP

Publication Details

Pages:

96
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/197
Stock No:

WPIEA2007197
ISBN:

9781451867619
ISSN:

1018-5941

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