OGResearch in Brief Adam Remo adam.remo@ogresearch.com March 21, 2013 Adam Remo OGResearch in Brief March 21, 2013 1 / 23 Who are we? Outline Who are we? What do we do? Who are we looking for? Adam Remo OGResearch in Brief March 21, 2013 2 / 23 Who are we? Not a common consultancy Macroeconomic consultancy . . . . . . Exploiting model-based tools, originally developed for (monetary) policy analysis, for profit-motivated activities . . . Orienting on emerging economies . . . With an outreach to applied economic research Some facts: Operating since 2009 About 25 employees currently (former CB or IMF employees, CERGE-EI alumni) Based in Prague Adam Remo OGResearch in Brief March 21, 2013 3 / 23 Who are we? Partners well recognized by international community David V´avra implemented a model-based forecasting in the CNB advised the Governor as IMF consultant, he advised on fixed to float exchange rate regime transitions and implementation of inflation targeting regimes in a number of other central banks Ondra Kamen´ık After leaving CNB, Ondra helped develop and launch the IMF’s GPM, GAPM and GIMF modeling frameworks developed Dynare++ and Sirius computational software for macro-modeling Martin Cincibuch was a monetary policy advisor to Bank board of the CNB coordinator of the monetary policy research in the CNB Adam Remo OGResearch in Brief March 21, 2013 4 / 23 Who are we? Global Outreach Adam Remo OGResearch in Brief March 21, 2013 5 / 23 What do we do? Outline Who are we? What do we do? Who are we looking for? Adam Remo OGResearch in Brief March 21, 2013 6 / 23 What do we do? Main Activities Macroeconomic projections of emerging market economies (17 countries) Macroeconomic misalignment monitor (31 countries) Consulting for central banks on monetary policy issues and model-based forecasting Ad hoc research projects Adam Remo OGResearch in Brief March 21, 2013 7 / 23 What do we do? Macroeconomic projections – Client Main client The Currency Exchange Fund (TCX) Amsterdam based fund Founded by development finance institutions to diversify foreign exchange exposure Adam Remo OGResearch in Brief March 21, 2013 8 / 23 What do we do? Macroeconomic projections – Where do we fit into the TCX’s business TCX offers cross-currency swaps Price of the swap depends on expected future exchange rate and interest rates, and their volatility/uncertainty Based on the macroeconomic projection we compute implied swap rates (prices) at non-existent, illiquid or severely distorted markets Adam Remo OGResearch in Brief March 21, 2013 9 / 23 What do we do? Macroeconomic projections – OGR’s framework The whole concept is called Forecasting and Policy Analysis System (FPAS) New Keynesian models of small open economy – you might have heard about this models in advance macro classes Models are tailored and calibrated to countries’ characteristics 06Q1 08Q1 10Q1 12Q1 14Q1 16Q1 300 400 500 600 Forecast 06Q1 08Q1 10Q1 12Q1 300 350 400 450 Historical simulations 0 5 10 15 20 0 100 200 300 400 500 600 700 Variance decomposition (100* log) Inflation Target Equilibrium REER UIP (Exchange Rate) USD per EUR Ex. Rate RU Demand Ex−Food CPI Inflation USD per RUB Ex. Rate others Irf: Response of QoQ Depreciation to Demand shock (pp) 0 5 10 15 20 25 −0.6 −0.4 −0.2 0 0.2 AMD per USD Adam Remo OGResearch in Brief March 21, 2013 10 / 23 What do we do? Macroeconomic projections – Belarus example State controlled economy heavily dependent on an oil-transit windfall (share of mineral exports ≈ 40%, energy subsidy worth of 13% of GDP in 2008). OGR expected terms of trade shock in 2011 due to new agreement with Russia on oil tariffs . . . . . . and substantial weakening of the BYR. OGR’s forecast outperformed other “competitors” and saved an investor from losses. Adam Remo OGResearch in Brief March 21, 2013 11 / 23 What do we do? Macroeconomic projections – Belarus example Real Effective Exchange Rate (100*log, depreciation up) 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1 14Q1 −1020 −1010 −1000 −990 −980 −970 −960 −950 Actual Data May 2010 Forecast Adam Remo OGResearch in Brief March 21, 2013 12 / 23 What do we do? Macroeconomic projections – Belarus example Table : Nominal BYR per USD Exchange Rate Forecasts Source Date of forecast 2010 2011 2012 BMI (eop) Jan 2010 2900.0(f) 2800.0(f) – GET (eop) Jul 2010 3150.0(e) 3300.0(f) – WB (avg) Jan 2011 2979.3 3046.2(f) 3096.1(f) GET (eop) Apr 2011 3000.0 3300.0(f) 3630.0(f) OGResearch (avg) May 2010 3052.1(f) 3583.0(f) 3904.5(f) OGResearch (eop) May 2010 3222.1(f) 3745.6(f) 3971.1(f) Actual Data (avg) as of Sep 30, 2011 2979.3 4104.2 – Actual Data (eop) as of Sep 30, 2011 3013.7 7750.0 – BMI: Business Monitor International; GET: German Economic Team; WB: World Bank Table : Yields on Eurobonds (monthly average, percent p.a.) Maturity Date of issuance Initial as of Sep 30, 2011 5-Year Government Bond Jul 2010 8.233 16.830 7-Year Government Bond Jan 2011 9.612 14.524 OGR 4Y swap rate as of May 2010: 21.3% p.a. Adam Remo OGResearch in Brief March 21, 2013 13 / 23 What do we do? Macroeconomic projections – Kenya example Excessively loose monetary policy Interest rates were steadily declining down to 1.3% until March 2011. The highest money growth on the analyzed sample (average YoY growth in 2010Q1-2011Q1 was about 14% and 20% of M0 and M3, respectively; compared to 2003-2009 averages of 9% and 13%). Besides exogenous shocks (droughts and commodity prices) the unfounded loose MP gave rise to depreciation and inflation expectations. . . . . . and boosted currency speculations potentially leading to depreciation-inflation spiral. OGR anticipated that substantial monetary policy tightening was necessary in order to bring inflation down and halt depreciation of the shilling. Adam Remo OGResearch in Brief March 21, 2013 14 / 23 What do we do? 1Y 2Y 3Y 4Y 5Y 10 15 20 August 2011 (Sharpe ratio: 2.03) 1Y 2Y 3Y 4Y 5Y 10 15 20 October 2011 (Sharpe ratio: 2.03) 1Y 2Y 3Y 4Y 5Y 10 15 20 January 2012 (Sharpe ratio: 1.07) 1Y 2Y 3Y 4Y 5Y 10 15 20 August 2012 (Sharpe ratio: 0.93) OGR Market 11M01 11M03 11M05 11M07 11M09 11M11 12M01 12M03 12M05 12M07 12M09 12M11 85 90 95 100 KES per USD Kenyan yield curves Adam Remo OGResearch in Brief March 21, 2013 15 / 23 What do we do? Macroeconomic Misalignment Monitor – Client and Purpose Main client TCX Purpose An early warning tool of sharp currency movements; helps investors and traders to identify potential currency risks Characteristics “Data mining” techniques (compared to judgments in the FPAS) Automatic and data release driven (update triggered by new data release) Adam Remo OGResearch in Brief March 21, 2013 16 / 23 What do we do? Macroeconomic Misalignment Monitor – Framework Decompose macroeconomic aggregates crucial for external balance into gaps and trends Kalman filter of rugged edge data of different frequencies Estimate relation between the gaps (and their lags) on currency movements Dynamic factor regression Adam Remo OGResearch in Brief March 21, 2013 17 / 23 What do we do? MANTIS – FPAS and MMM on a web portal All our FPAS projections and MMM analyses are available on Mantis upon free registration Adam Remo OGResearch in Brief March 21, 2013 18 / 23 What do we do? Consulting Clients IMF, EBRD, WB, central banks Consulting on Model-based monetary policy analysis Monetary policy formulation Monetary policy regimes transitions Organization of internal processes Internal and external policy communication 10+ Countries Africa: Egypt, Kenya, Rwanda, Uganda, Tanzania, Mozambique Post-soviet countries: Russia, Georgia, Armenia, Moldova, Tajikistan, Kyrgyzstan, Mongolia Oman, Haiti Adam Remo OGResearch in Brief March 21, 2013 19 / 23 What do we do? Ad hoc research projects Clients IMF, OECD, CZ MinFin, . . . Projects Cooperation in developing a new Debt Sustainability Framework with IMF research department Including necessary software development Implementation of extensions to IMF’s Global Prediction Model Development of modeling framework suitable for fiscal sustainability analysis Research in medium-term investment strategies for emerging markets Adam Remo OGResearch in Brief March 21, 2013 20 / 23 Who are we looking for? Outline Who are we? What do we do? Who are we looking for? Adam Remo OGResearch in Brief March 21, 2013 21 / 23 Who are we looking for? Qualities Smart, reliable, and responsible people in general In particular, advantage is if you are interested in Macroeconomics Math\Statistics Programming Adam Remo OGResearch in Brief March 21, 2013 22 / 23 Who are we looking for? Positions We have two main junior positions: Model operators more technical job, programming basics necessary, more likely to go on missions Analysts demanding on analytical skills, managing people, reports writing Ultimately, we want people to become senior economists (i.e. country leaders, mission leaders, etc.) Adam Remo OGResearch in Brief March 21, 2013 23 / 23