Bank of Thailand MacroeconometricModel (BOTMM) · Bank of Thailand MacroeconometricModel (BOTMM) Modellingand Forecasting Team, Monetary Policy Department ... Economic Models at the

Bank of Thailand Macroeconometric Model

(BOTMM)

Modelling and Forecasting Team, Monetary Policy Department

17 December 2008

Presented at the Workshop on

Economic Models at the Bank of Thailand

2

OutlineOutlineOutlineOutline

� Motivation

� Philosophy of a macroeconometric model

� Macroeconometric model at the BOT

– Roles

– Structure and linkages

– Performance and simulations

– Challenges ahead

� Conclusion

� Issues for discussion

3

MotivationMotivationMotivationMotivation

� The MPC need an economic model for

– Assessing economic outlook in the 8 quarters ahead in order to

determine the appropriate stance of monetary policy

– Evaluating the effects of changes in economic factors and

policies on the economy

� Why macroeconometric model?

– Straightforward and easy for public communication

– Balancing between data and economic theory

4

MotivationMotivationMotivationMotivation

� Macroeconometric models developed for Thailand from other

institutes

– NESDB, FPO, and TDRI

5

Philosophy of a Philosophy of a Philosophy of a Philosophy of a macroeconometricmacroeconometricmacroeconometricmacroeconometric modelmodelmodelmodel

� Balancing between

– data and economic theory

– in-sample fitting and

out-of-sample forecasting

� Cointegration relationship

VARVARVARVAR

DSGEDSGEDSGEDSGE

BOTMMBOTMMBOTMMBOTMM

Data basisData basisData basisData basis

Theory basisTheory basisTheory basisTheory basis

6

MacroeconometricMacroeconometricMacroeconometricMacroeconometric model at the BOTmodel at the BOTmodel at the BOTmodel at the BOT

� Based on quarterly data since 1993Q1

� Designed to capture relationships between key

economic variables

� Served as a tool for MPC under the Inflation Targeting

monetary policy framework

7

Steps in buildingSteps in buildingSteps in buildingSteps in building a a a a macroeconometricmacroeconometricmacroeconometricmacroeconometric modelmodelmodelmodel

MacroeconometricMacroeconometricMacroeconometricMacroeconometric

ModelModelModelModel

LongLongLongLong----run equationrun equationrun equationrun equation

(OLS, calibration)(OLS, calibration)(OLS, calibration)(OLS, calibration)

Quarterly economic Quarterly economic Quarterly economic Quarterly economic

data (data (data (data (sasasasa or or or or nsansansansa))))

CointegrationCointegrationCointegrationCointegration

relationshiprelationshiprelationshiprelationship

ShortShortShortShort----run equationrun equationrun equationrun equation

(OLS)(OLS)(OLS)(OLS)IdentitiesIdentitiesIdentitiesIdentities Other LR + SR Other LR + SR Other LR + SR Other LR + SR

equationsequationsequationsequations

Error correctionError correctionError correctionError correction

termtermtermterm

Economic Economic Economic Economic

theorytheorytheorytheory

Model property testingModel property testingModel property testingModel property testing

8

Roles of the Roles of the Roles of the Roles of the macroeconometricmacroeconometricmacroeconometricmacroeconometric model at the BOTmodel at the BOTmodel at the BOTmodel at the BOT

Over the 8 quarters ahead ...

– Baseline forecasting

–Nowcasting and forecasting

– Policy simulation and scenario analysis

9

Role in baseline forecastingRole in baseline forecastingRole in baseline forecastingRole in baseline forecasting

Economic Theory & DataEconomic Theory & DataEconomic Theory & DataEconomic Theory & Data

MacroeconometricMacroeconometricMacroeconometricMacroeconometric ModelModelModelModel

Preliminary Economic Forecasts Preliminary Economic Forecasts Preliminary Economic Forecasts Preliminary Economic Forecasts

(Baseline)(Baseline)(Baseline)(Baseline)

Probability Distribution of Probability Distribution of Probability Distribution of Probability Distribution of

Forecasts (Forecasts (Forecasts (Forecasts (FanchartFanchartFanchartFanchart))))

Monetary Policy DecisionMonetary Policy DecisionMonetary Policy DecisionMonetary Policy Decision

Policy AssumptionsPolicy AssumptionsPolicy AssumptionsPolicy AssumptionsAssumptions on Assumptions on Assumptions on Assumptions on

World Economy World Economy World Economy World Economy

and Pricesand Pricesand Pricesand Prices

Scenario Analysis and Scenario Analysis and Scenario Analysis and Scenario Analysis and

Assessment of RisksAssessment of RisksAssessment of RisksAssessment of Risks

Sector Sector Sector Sector

SpecialistsSpecialistsSpecialistsSpecialists

Other ModelsOther ModelsOther ModelsOther Models

JudgmentJudgmentJudgmentJudgment


NAFFNAFFNAFFNAFF

Forecasting and monetary policy decision process:



10

NowcastingNowcastingNowcastingNowcasting and forecastingand forecastingand forecastingand forecasting

� Nowcasting (Short-term forecasting for Q0)

– judgments are imposed by modellers and sectoral experts, using

available real-time economic indicators and other information

that cannot be captured by the model (e.g. impact of airport

closed down in Nov08)

� Forecasting (Longer term forecasting for Q1-Q8)

– dynamic suggested by the model and assumptions on

exogenous variables

Q0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8

Indicators BOTMM + Assumptions

11

Role in policy simulation and scenario analysisRole in policy simulation and scenario analysisRole in policy simulation and scenario analysisRole in policy simulation and scenario analysis

Economic Theory & DataEconomic Theory & DataEconomic Theory & DataEconomic Theory & Data

MacroeconometricMacroeconometricMacroeconometricMacroeconometric ModelModelModelModel

Preliminary Economic Forecasts Preliminary Economic Forecasts Preliminary Economic Forecasts Preliminary Economic Forecasts

(Baseline)(Baseline)(Baseline)(Baseline)

Policy AssumptionsPolicy AssumptionsPolicy AssumptionsPolicy AssumptionsAssumptions on Assumptions on Assumptions on Assumptions on

World Economy World Economy World Economy World Economy

and Pricesand Pricesand Pricesand Prices

Sector Sector Sector Sector

SpecialistsSpecialistsSpecialistsSpecialistsJudgmentJudgmentJudgmentJudgment

NAFFNAFFNAFFNAFF

Forecasting and monetary policy decision process:

Probability Distribution of Probability Distribution of Probability Distribution of Probability Distribution of

Forecasts (Forecasts (Forecasts (Forecasts (FanchartFanchartFanchartFanchart))))

Monetary Policy DecisionMonetary Policy DecisionMonetary Policy DecisionMonetary Policy Decision

Scenario Analysis and Scenario Analysis and Scenario Analysis and Scenario Analysis and

Assessment of RisksAssessment of RisksAssessment of RisksAssessment of Risks

Other ModelsOther ModelsOther ModelsOther Models




12

Types of shockTypes of shockTypes of shockTypes of shock

� Policy shock

– Monetary policy

– Fiscal expenditure

� Domestic shock

– Minimum wage

� External shock

– Dubai oil price

– Trading partners’ GDP growth

– Fed funds rate

13

BOTMM main structureBOTMM main structureBOTMM main structureBOTMM main structure

Demand componentsDurable consumption (CPR1)Non-durable consumption (CPR2) Private investment (IPR)

Exports of goods and services (XR)Imports of goods and services (MR)

Govt consumption (GCOVR)Public investment (IPUBR)

OthersBond and stock mkt cap (BMCAP)Private capital flows (CAPITAL$PRI)

PricesCore CPI / CPI energy / CPI rawfoodProducer price index (PPI)Retail petroleum price index (RPPI)

Private investment deflator (PIP)Govt consumption deflator (PGCON)Govt investment deflator (PIFX)Export deflator (PX) / Imports deflator (PM)

Average wage (AVGEARN)Exchange rates (FX, NEER, REER)Interest rates (MLR)

Government expenditureGovt consumption / investmentGovt transfer

External demandTrading partner GDP (TPGDP)

Domestic pricesFarm price / Minwage / Policy rate (RP1D)

External pricesDubai / Non-fuel commodities (PWNONF)Trading partner CPI (TPCPI)Regionfx / JPY / EUR / Fed funds rate

ENDO

EXO

14

Linkages inLinkages inLinkages inLinkages in real GDP componentsreal GDP componentsreal GDP componentsreal GDP components

SR + LR

Domestic Demand

XR

PM$*FX/CPI (SR)

XR MR

After-taxed GDPN/CPI

BMCAP/CPI

MLR-INFEX

After-taxed GDPN /CPI

MLR-INFEX

GDPR

MLR-INFEX

CPR1

CGOVR

CPR2 C I

IPUBR

IPR

GDPR

G

+

+

==

TPGDP

REER

Trend (LR)SR + LR

=

SR + LRSR + LR

SR + LR

SR = Short Run EquationLR = Long Run Equation

CGOVN/PGCON IPUBN/PIFX

15

Linkages inLinkages inLinkages inLinkages in external sectorexternal sectorexternal sectorexternal sector

+

CAPITAL$

NFA

FX

Expected FX

FEDFUND-RP1D

REGIONFX

CURRENTB/ GDPN

=

NFA(-1)

BPB

CURRENT$ +

XR*PX$ MR*PM$

BP$ RESERVE(-1) = RESERVE

RP1D-FEDFUND

CURRENT$

GDPR

CAPITAL$PRI

REGIONFX,JPY,EUR,USD NEER

TPCPI

REER

FX

*

*

*FX

CPI

16

InflationInflationInflationInflation

Farm price DUBAI PWNONF

Retail petroleum price index

PMG$

MINWAGE

CPIRFOOD CPIEN Core CPI Headline CPI+ + =

AVGEARN Output Gap

Producer Price Index

Core CPI t-1

SRLR

SR

LRSR + LR

SR + LR SR + LR

PIP PIFXNEER

PXG$

/FX

*FX

*FX

*FX

17

Transmission mechanism of monetary policyTransmission mechanism of monetary policyTransmission mechanism of monetary policyTransmission mechanism of monetary policy

InstrumentsInstrumentsInstrumentsInstruments

Market interest rateMarket interest rateMarket interest rateMarket interest rate

Asset pricesAsset pricesAsset pricesAsset prices

Exchange rateExchange rateExchange rateExchange rate

Domestic Domestic Domestic Domestic

demanddemanddemanddemand

Net Net Net Net

external external external external


Total Total Total Total


(GDP)(GDP)(GDP)(GDP)

Domestic Domestic Domestic Domestic

inflationary inflationary inflationary inflationary

pressurepressurepressurepressure

Import and Import and Import and Import and

export pricesexport pricesexport pricesexport prices

InflationInflationInflationInflation

ExpectationsExpectationsExpectationsExpectations

18

Performance in the inPerformance in the inPerformance in the inPerformance in the in----sample forecastsample forecastsample forecastsample forecast

% y

oy

-15

-10

-5

0

5

10

15

94 96 98 00 02 04 06

YGRWTH

Output Growth: Historical Simulation

-2

0

2

4

6

8

10

12

94 96 98 00 02 04 06

INFLAT

Headline Inflation: Historical Simulation

actualactualactualactual

forecastforecastforecastforecast



19

Performance in the inPerformance in the inPerformance in the inPerformance in the in----sample forecastsample forecastsample forecastsample forecast

% y

oy

-16

-12

-8

-4

0

4

8

12

94 96 98 00 02 04 06

CGRWTH

Consumption Growth: Historical Simulation

-60

-50

-40

-30

-20

-10

0

10

20

30

94 96 98 00 02 04 06

IGRWTH

Investment Growth: Historical Simulation

-10

-5

0

5

10

15

20

25

94 96 98 00 02 04 06

XGRWTH

Export Growth: Historical Simulation

-30

-20

-10

0

10

20

30

40

50

60

94 96 98 00 02 04 06

MGRWTH

Import Growth: Historical Simulation

% y

oy









20

Permanent increase in policy rate by Permanent increase in policy rate by Permanent increase in policy rate by Permanent increase in policy rate by 25 basis points25 basis points25 basis points25 basis points

-.24

-.20

-.16

-.12

-.08

-.04

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(CPR_RAT-1)*100

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(IPR_RAT-1)*100

-.012

-.010

-.008

-.006

-.004

-.002

.000

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(XR_RAT-1)*100

-.32

-.28

-.24

-.20

-.16

-.12

-.08

-.04

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(MR_RAT-1)*100

-.12

-.10

-.08

-.06

-.04

-.02

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(GDPR_R AT-1)*100

-.030

-.025

-.020

-.015

-.010

-.005

.000

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(CPI_RAT-1)*100

-.04

-.03

-.02

-.01

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

(C ORE_RAT-1)*100

-.08

-.06

-.04

-.02

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1FX/B_FX*100-100

Private consumption Private investment Exports G&S Imports G&S

GDP Headline CPI Core CPI THB/USD

% of deviation from baseline starting from 2008Q3

21

-.100

-.075

-.050

-.025

.000

.025

.050

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPR/B_CPR*100-100

-.3

-.2

-.1

.0

.1

.2

.3

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1IPR/B_IPR*100-100

.00

.04

.08

.12

.16

.20

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1XR/B_XR*100-100

-.16

-.12

-.08

-.04

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1MR/B_MR*100-100

.00

.05

.10

.15

.20

.25

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1GDPR/B_GDPR*100-100

.000

.025

.050

.075

.100

.125

.150

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPI/B_CPI*100-100

-.04

.00

.04

.08

.12

.16

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CORE/B_CORE*100-100

0.0

0.2

0.4

0.6

0.8

1.0

1.2

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1FX/B_FX*100-100

1%1%1%1% Permanent depreciation in THB/USD exchange rate Permanent depreciation in THB/USD exchange rate Permanent depreciation in THB/USD exchange rate Permanent depreciation in THB/USD exchange rate




22

.0

.1

.2

.3

.4

.5

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPR/B_CPR*100-100

0.0

0.2

0.4

0.6

0.8

1.0

1.2

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1IPR/B_IPR*100-100

0.0

0.5

1.0

1.5

2.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1XR/B_XR*100-100

0.0

0.4

0.8

1.2

1.6

2.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1MR/B_MR*100-100

0.0

0.2

0.4

0.6

0.8

1.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3


-.01

.00

.01

.02

.03

.04

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPI/B_CPI*100-100

-.02

.00

.02

.04

.06

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3


-.04

-.03

-.02

-.01

.00

.01

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1FX/B_FX*100-100

1%1%1%1% Permanent increase in trading partner GDP Permanent increase in trading partner GDP Permanent increase in trading partner GDP Permanent increase in trading partner GDP




23

-.7

-.6

-.5

-.4

-.3

-.2

-.1

.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPR/B_CPR*100-100

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1IPR/B_IPR*100-100

-.16

-.12

-.08

-.04

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1XR/B_XR*100-100

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1MR/B_MR*100-100

-.4

-.3

-.2

-.1

.0

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3


.0

.1

.2

.3

.4

.5

.6

.7

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1CPI/B_CPI*100-100

.00

.05

.10

.15

.20

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3


-.28

-.24

-.20

-.16

-.12

-.08

-.04

.00

08Q1 08Q3 09Q1 09Q3 10Q1 10Q3

S1FX/B_FX*100-100

10%10%10%10% Permanent increase in Dubai oil pricePermanent increase in Dubai oil pricePermanent increase in Dubai oil pricePermanent increase in Dubai oil price




24

Simulation resultsSimulation resultsSimulation resultsSimulation results

0.080.080.080.080.020.020.020.020.060.060.060.060.060.060.060.06----0.070.070.070.070.170.170.170.17FX (+1%)FX (+1%)FX (+1%)FX (+1%)

0.040.040.040.040.010.010.010.010.030.030.030.030.000.000.000.00----0.090.090.090.090.790.790.790.79TPGDP (+1%)TPGDP (+1%)TPGDP (+1%)TPGDP (+1%)

----0.020.020.020.020.000.000.000.00----0.010.010.010.01----0.010.010.010.01----0.050.050.050.05----0.060.060.060.06RP1D (+0.25)RP1D (+0.25)RP1D (+0.25)RP1D (+0.25)

0.110.110.110.110.040.040.040.040.170.170.170.170.430.430.430.43----0.130.130.130.13----0.190.190.190.19DubaiDubaiDubaiDubai

AvgAvgAvgAvg of last of last of last of last

4Qs4Qs4Qs4Qs

AvgAvgAvgAvg of first of first of first of first

4Qs4Qs4Qs4Qs


4Qs4Qs4Qs4Qs


4Qs4Qs4Qs4Qs


4Qs4Qs4Qs4Qs


4Qs4Qs4Qs4Qs

Core inflationCore inflationCore inflationCore inflationHeadlineHeadlineHeadlineHeadline inflationinflationinflationinflationGDPGDPGDPGDP GrowthGrowthGrowthGrowthShock Shock Shock Shock

(+10%)(+10%)(+10%)(+10%)

Result (%Result (%Result (%Result (%YoYYoYYoYYoY difference from baseline)difference from baseline)difference from baseline)difference from baseline)

25

ConclusionConclusionConclusionConclusion

� Macroeconometric model is straightforward and easy for

public communication.

– Providing components of GDP forecasting and

serving the MPC needs for policy making

– Balancing between data and economic theory

– For short-term, add judgment from sectoral experts,

and for longer term, use model dynamics with

judgment

26

Challenges aheadChallenges aheadChallenges aheadChallenges ahead

� Consideration of other important variables that may be

included in the model

– market interest rates, e.g. bond yield

– private credit

– household wealth indicators

– property price and bank deposits

– potential GDP measured by production function

27

Issues for discussionIssues for discussionIssues for discussionIssues for discussion

� How involved should policymakers be in the process of

model building and forecast production

� How to balance between data fitting and out-of-sample

forecast

– Role of judgments in building a macroeconometric

model

– Model specification

– Parameters in long-run equation

Documents

Bank of Thailand MacroeconometricModel (BOTMM) · Bank of Thailand MacroeconometricModel (BOTMM) Modellingand Forecasting Team, Monetary Policy Department ... Economic Models at the