An Open-Economy DSGE Model with Nontradables and Remittances Ruperto Majuca, Ph.D. Lawrence...
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An Open-Economy DSGE Model with Nontradables and Remittances Ruperto Majuca, Ph.D. Lawrence Dacuycuy, Ph.D. De La Salle University, Manila Philippine Economic
An Open-Economy DSGE Model with Nontradables and Remittances
Ruperto Majuca, Ph.D. Lawrence Dacuycuy, Ph.D. De La Salle
University, Manila Philippine Economic Society (PES) 52 nd Annual
Meeting Intercontinental Hotel, Makati November 14, 2014
Slide 2
Outline Introduction Theoretical Structure Estimation and
Results Concluding Remarks
Slide 3
Background, 1 Traditional PH models (equation-by-equation OLS,
ECM) NEDA QMM PIDS Ateneo (AMFM), others Simultaneity bias,
exogeneity issue Estimates are biased and inconsistent Increasing
sample cannot cure bias in estimates Lucas (1976) critique
Coefficient estimates are not policy invariant Lucas: conclusions
and policy advice based on these models are invalid and
misleading
Slide 4
Background, 2 Post Lucas critique. Now standard: modern,
dynamic quantitative economics Dynamic stochastic general
equilibrium (DSGE models) Microfoundations Explicitly specify
behavior of rational agents Market clearing, rational expectations,
dynamics Bayesian estimation techniques: Priors plus Bayesian
updating via Kalman filter; Markov Chain Monte Carlo
Slide 5
Specify the model (consumers, firms, etc.) First-order
conditions; these are expectational stochastic difference equations
Stationarize/detrend Steady state of the model Log-linear
deviations from the steady state Linear rational expectation model
Bayesian estimation Dynare Analysis and interpretation, policy
implications DSGE Cookbook
Slide 6
Adolfson, Laseen, Linde, Villani (JEDC 2008, JIE 2007) Acosta,
Lartley, Mandelman (JIE 2009) Money in the utility function
Consumption habits Capital and investment adjustment costs Sticky
prices and wages Open-economy: exports, imports, exchange rate,
etc. Remittances, Dutch disease Theoretical Structure
Slide 7
Households, 1
Slide 8
Households, 2
Slide 9
Households, 1
Slide 10
Households, 2
Slide 11
Households, 3
Slide 12
Households, 4
Slide 13
Firms, 1
Slide 14
Firms, 2
Slide 15
Firms, 3
Slide 16
Firms, 4
Slide 17
Government and Central Bank,
Slide 18
Aggregate Resource Constraint, +
Slide 19
Remittances,
Slide 20
Loglinearized Model, 1,
Slide 21
Loglinearized Model, 2,
Slide 22
Loglinearized Model, 3,
Slide 23
Loglinearized Model, 4,
Slide 24
Loglinearized Model, 5,
Slide 25
Loglinearized Model, 6,
Slide 26
Impulse Response of Total Remittances, 1 An unexpected increase
in interest rates may increase remittances. The link between shocks
to monetary policy and output is negative, which may partly explain
why the initial impact on remittances is positive
Slide 27
Impulse responses to monetary policy shock
Slide 28
Impulse Response of Total Remittances, 2 An exogenous increase
in govt spending will reduce remittances The link between govt
spending and output is positive, which may partly explain why the
initial impact on remittances is negative Over time, as the impact
of the govt spending shock diminishes, remittances will be
increasing
Slide 29
Impulse responses to a government spending shock
Slide 30
Impulse Response of Total Remittances, 3 Foreign variables also
affect remittances. Consider foreign inflation shock. A positive
shock will result in an increase in remittances. It certainly is
more favourable in countries where monetary policy aims to maintain
price stability. In contrast, the effect of foreign output shocks
is to reduce remittances.
Slide 31
Impulse responses to a foreign inflation shock
Slide 32
Impulse responses to a foreign output shock
Slide 33
Impulse Response of Remittances, by Components, 1 Sector
specific stationary technological shocks appear to have divergent
effects on remittance components. A positive shock in the tradable
sector appears to induce increases in all remittance components. On
the other hand, if the shock emanates from the nontradable sector,
robust negative effects are observed instead. Unit root
technological shocks robustly cause a decline in
countercyclical.
Slide 34
Impulse responses to a stationary tradable sector specific
technology shock
Slide 35
Impulse responses to a stationary nontradable sector specific
technology shock
Slide 36
Impulse responses to a unit root technology shock
Slide 37
Impulse Response of Remittances, by Components, 2 When there is
a positive government spending shock, all remittance components are
affected negatively. As expected, a consumption preference shock
will increase remittances via its procyclical and countercyclical
components but the effect diminishes quickly. The strategic
component does not react positively to such as shock at all.
Slide 38
Impulse responses to a consumption preference shock
Slide 39
Impulse responses to a labor supply preference shock
Slide 40
Impulse Response of Remittances, by Components, 3 Investment
specific shocks indicate that the positive over-all effect on total
remittances come consistently from the strategic component. The
Figure shows that there is a very sizable increase in remittances
after the occurrence of the shock. Mark up shocks in the tradable
goods sector induce a reduction in strategic remittances but causes
an increase in countercyclical remittances.
Slide 41
Impulse responses to an investment specific shock
Slide 42
Impulse responses to domestic (tradable) markup shock
Slide 43
Concluding Remarks In this paper, we augment the existing Open
Economy DSGE model of ALLV by distinguishing the nontradable and
tradable sectors and including remittances. This makes our model
more stylized given the fact that the Philippines remain as one of
the top remittance receiving countries in the world.
Slide 44
Concluding Remarks We estimated the dynamics of various
macroeconomic variables after individually considering exogenous
shock processes. We focused our analysis on the response of
remittances on shock processes. This is an important undertaking
because of the role remittances play in stabilizing foreign
exchange markets and providing support to economic activities
involving households and firms.
Slide 45
Concluding Remarks While the model appears to capture fairly
well some stylized facts, we recognize that there are some
inadequacies. First, the paper did not define a stochastic process
for remittances. Second, the impulse response functions, while
informative, were based on stochastic simulation methods, not
actual data. Third, the model made the assumption that while there
are two sectors with their own production processes for their
respective intermediate goods firms, there is only one real wage
which implies total labor was the one considered.
Slide 46
Concluding Remarks Fourth, the model assumes that households
have access to capital markets, which may not be reflective of the
real situation as other households can be classified as rule of
thumb households. Fifth, the model does not integrate the financial
markets and its various agents, thereby ignoring financial
frictions as one probable cause of economic fluctuations.