IMF Working Papers

A Simple DGE Model for Inflation Targeting

Publication Date:

August 1, 2007

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2007/197

Subject:

Consumption Exchange rates Inflation Inflation targeting Real exchange rates