MPE_AMEM: Azerbaijan 2015-2016
Tomas Motl, Course for Masaryk University, Spring 2021
What Happened
Oil Shock
Rapid, permanent decline of oil price:
Large drop in export revenues:
Two problems here:
drop in fiscal revenues (austerity, decline in domestic demand)
imbalance in the forex market
BoP problems
Note:
CA surplus disappeared
FA deficit (outflows) intensified:
Outflows before: e.g. SOFAZ investments
Outflows in 2015 - people trying to run away from manat
CBA replaced missing inflows by selling forex reserves
But forex reserves sales was a temporary to permanent problem:
How can you solve the imbalance:
permanently increase borrowing (from where?)
increase exports again (how? how quickly?)
decrease imports (how?)
restrictions
making imports more expensive
lower household incomes in LCY with the same FX rate
same household incomes in LCY with weaker FX rate
CBA Response
But eventually CBA had to allow for weaker FX rate. Why not weaker wrt Russian ruble?
Important: FX interventions are also monetary policy!
Evaluation:
CBA postponed inevitable
faster adjustment would have saved reserves, helped economy, shortened the
crisis
expectations: people knew devaluation was coming, so pressure on
inflation (no body wants to hold manat)
crisis was inevitable, baked in the FX regime
Impact on REER
Permanent impact on REER (trend):
Impact on inflation / CPI
CPI change much smaller than the FX change.
REER adjustment requires that relative prices change. Import prices went up, prices of
domestic production (wages) remained low.
Very typical for the fundamental shocks. Very different from UIP / CPI target shocks.
That's why estimation on data is very difficult unless you have long time series where all
shocks are proportionally represented.
CBA hiked rates to calm public and control inflation expectations. Probably had not a
large effect, cause of weak transmission.
 
Do you believe this CBA statement?
"This decision is based on the purpose of creating additional incentives for diversification of
national
economy, to reinforce international competitiveness and export potential, and therefore, to
ensure the
strategic sustainability of balance of payments and solvency."
Impact on growth
 
How to Model It
Our job is to choose a suitable combination of shocks to represent the effects above.
Oil price is part of foreign block and therefore will be imposed automatically, no need to
do anything there.
We have oil effects in the model, but they will not be sufficient to give us a good forecast:
model is calibrated for "normal" times, crisis is different, real world is non-linear
model is missing some transmission channels
model is imperfect as it is
We start with overview how variables should move
Trends
(permanent), quick shift in REER trend level (by ?%)
(permanent) slowdown in REER appreciation
(partly temporary) increase in country risk premium
(partly temporary) drop in potential output growth
(temporary) increase in CPI target tp represent elevated inflation expectations
Gaps
REER gap initially overvalued, then overshooting into undervaluation (typical
pattern)
output gap to the negative
RIR gap - ?
How to do it
1. Run plain forecast: do not put any tunes. We will observe what the model +
external assumptions implies.
(command in Matlab: "c.forecast('baseline')")
2. Identify where the forecast goes wrong.
3. Start with trends - implement tunes, observe results.
4. Add gap tunes, observe results.
5. Repeat 2-4 until happy.
Reports
cmop will generate forecast report which you can use to understand the forecast.
You can also run file "compare_results.m" which will compare your forecast of main
variables to the actual historical data.
 
Technicalities
Adding Tunes
Add tunes to file "az_model/tunes/az_baseline_tunes.csv". Do not delete anything from
this file. If you mess it up, download the file again from IS.
You can add new columns to add tunes. Column header should be the name of shock or
variable (as in the model file) you want to tune. Shock = soft tune, variable = hard tune.
Preferably use shock tunes only.
Note
The CSV file can be open in Excel. However, Czech Excel version will most likely display it
wrongly, because it expects columns to be separated by semicolon ";", while the are
separated by comma ",".
To fix that, see the third suggested solution here:
https://kb.paessler.com/en/topic/2293-i-have-trouble-opening-csv-files-with-microsoft-e
xcel-is-there-a-quick-way-to-fix-this
Or download LibreOffice (free, https://www.libreoffice.org/download/download/) and
open the CSV in LibreOffice.
The file should look like this: