evropský
,„ -;- MINISTERSTVO ŠKOLSTVÍ, OPVzdílívírl
fondvCR    EVROPSKÁ UNIE     MLÁDEŽE A TĚLOVÝCHOVY     pro konkurence.chopii
INVESTICE DO ROZVOJE VZDĚLÁVÁN!
G3 Model
Structural Economic Modelling at the CNB (core DSGE
model)
Jaromír Tonner Macroeconomic Forecasting Division Monetary and Statistics Dept
Unit of Economic Modelling        G3 Model
General Conditions
• Semestral Essay on a chosen topic (either offered or approved own).
• Exam is a discussion about the essay by email.
• Evaluation considers the quality of an essay among others.
• The best essays are stored for a possible employment offer to students.
Unit of Economic Modelling        G3 Model
• 1. 27.9. General Introduction to Macroeconomic Modelling for Monetary Policy: Tibor Hlédik
2. 27.9. Specifics of Building Structural Models in Selected Countries: Tibor Hlédik
• 3. 11.10. Short-Term Forecasting Using Factor Models: David Havrlant, Peter Tóth
4. 11.10. Selected Topics in Short-Term Forecasting: David Havrlant, Peter Tóth
• 5. 18.10. Two-Country Modelling: Real Convergence: Jan Bruha
6. 18.10. Two-Country Modelling: Computational Aspects: Jan Bruha
• 7. 25.10. Structural Economic Modelling at the CNB (core DSGE model): Jaromír Tonner
8. 25.10. Tools for Monetary Policy with DSGE Models: Jaromír Tonner
• 9. 1.11. Financial Frictions in DSGE models: general introduction: Jiří Polanský
10. 1.11. Financial Frictions in DSGE models: modelling approaches: Jiří Polanský
• 11. 8.11. Quarterly Projection Model: František Brázdik 12. 8.11. Getting in touch with QPM: František Brázdik
• 13. February 2012 Overview and Conclusions: Jaromír Tonner °     » o^o
Unit of Economic Modelling        G3 Model
Introduction
• There are two antagonistic goals in modelling economic reality:
• to have a simple model in order to interpret its dynamics (SIMPLICITY), but
• there are always some observed facts we would like to incorporate (COMPREHENSIVENESS).
• We are anywhere between..
• The objective of the talk is to simply explain our framework for forecasting and monetary policy analysis.
Unit of Economic Modelling        G3 Model
Outline
• Short description of g3 model
• Identification and interpretation of initial conditions
• Projection simulation conditioned on exogenous variables and judgements
• Scenario analysis and forecast dynamics decomposition
• Communication of the forecast
Unit of Economic Modelling        G3 Model
Aim of the Presentation
• Provide a brief introduction to the g3 model
• Explain (non-technically) main differences between between QPM and g3 models
• Emphasis on g3's added value w.r.t. QPM
• Introduction to models' mechanisms via impulse response analysis
• Provide a brief overview of analytical and forecasting potential of the g3
Unit of Economic Modelling        G3 Model
g3 - General Characteristics
• The model follows some recent developments in construction dynamic models for policy analysis
• Nominal frictions enrich the RBC dynamics
• Model is consistent with stock-flow national accounting
• 11 sectors (households, 2 intermediate goods production sectors, 4 final goods production sectors, central monetary policy authority, central fiscal policy authority, forex dealers, rest of the world)
Unit of Economic Modelling        G3 Model
g3 - Some Common Features with QPM
• GE SOE models for the Czech economy (tailor-made for the Czech economy)
• Inflation targeting regime
• Forward-looking monetary policy rule
• Agents are aware of the policy rule (no credibility or communication uncertainties)
• Structural model with forward looking rational expectations
Unit of Economic Modelling        G3 Model
g3's Improvements w.r.t. QPM
• g3 contains trends (not a reduced-form gap model)
• Loss of output gap, technologies instead
• Consistent stock-flow national accounting
• Better communication with NTF about GDP components
• More detailed structure of the model
• More robust determination of initial conditions
• =^ provides answers to more structural questions (national accounting, structural shocks, dynamics of technologies, structural changes, shocks decomposition etc.)
Unit of Economic Modelling        G3 Model
Sectors of the g3 model
• A continuum of monopolistically competitive households (labor supply)
• A continuum of monopolistically competitive domestic intermediate firms (single variety of intermediate good)
• Imported intermediate goods producers (a continuum of countries)
• Four final good producers (consumption, export, investment, government)
• Monetary a fiscal authorities
• Closing the model (forex dealers)
Unit of Economic Modelling        G3 Model
g3 model - structure
Rest of World
Sticky In Home Prices
Importers (N)
Sticky In Foreign Prices
Capital Goods, (J) J = f(N), linear
Consumption Goods, (C) C = f(N,Y), Leontief
Export Goods, (X) X = f(N,Y), Leontief
Gov. Consumption
Goods, (G) G-f(Y), Loentlel
J, C, G, N Sticky in Home Prices
Capital
Sticky Wages
Unit of Economic Modelling        G3 Model
Many words - example is needed
• (201OY rGDP: 3000 = 1528 + 788 + 568 + 3375 - 3304)
• 201 OY rGDP: 3000 = 1500 + 800 + 700 + 3400 - 3400
• 2000Y rGDP: 2200 = 1200 + 700 + 500 + 1400 - 1400
• 201 OY nGDP: 3700 = 1900 + 850 + 850 + 2900 - 2900
I
• Defl. 2000: 23 = 26 + 6 + 33 + (-15) - (-15)
• Av. Growth: 3 = 2 + 1.5+ 3 + 8- 8
• GDP shares: 1 = 0.5 + 0.25 + 0.25 + 1 -1
u
• Imp shares: CM 20%, IM 100%, XM 55%
3000 = 1200 + 300 + 800 + 700 + 3400 - (300 + 800 + 2300)
• 3000 = 1200 + 700 + 3400 - 2300
Unit of Economic Modelling        G3 Model
Stylized Facts #1- Relevance of the Model
• Balanced growth path (BGP)
• Constant specific nominal expenditure shares on nominal GDP in the steady-state (except export and import)
• This specification allows for differential growth of real quantities on the BGP, offset by evolution in relative prices
• Price stickiness cascading
• Calvo's setting in wage sector, domestic intermediate goods, imported intermediate goods, consumption final goods, export goods sector, investment goods sector, public spending goods sector
o nominal wage stickiness is significantly larger than consumer price stickiness
• Real rigidities and frictions
• External habit formation (0.85)
• Investment adjustment costs
Unit of Economic Modelling        G3 Model
Stylized Facts #2- Relevance of the Model
• Import intensity of exports and increase in trade openness of the economy
• Significant excess in long-run growth of trade volumes with respect to output growth is inconsistent with standard SOE BGP
• Large part of imports serves as a component for export goods production - massive inflow of foreign direct investment —>• increase in trade openness
• Gradual exchange-rate pass-through guaranteed by
O Multiple price rigidities (different parametrization of Calvo's parameters)
O Local currency pricing (exporters' prices are sticky in foreign currency, importers' prices are sticky in domestic currency)
• Real exchange rate appreciation in consumption prices (Harrod-Balassa-Samuelson Effect)
Unit of Economic Modelling        G3 Model
Many words - example is needed again
• PjYt = PfCt + PJtJt + PfGt + PfXt - P?Nt
• 2-3 = 2-2 + 1 -1.5 + 3-3 + (-1)-8 - (-1)-8
• but constant nominal shares except exports and imports.
1
PfC, P{h_ PfCh PfXi _ PfNi PfY,      PfY,      PfY,      PfY, PfY,
• 1 = 0.5 + 0.25 + 0.25 + 0.8 - 0.8
• technologies are needed to capture this mismatch
2+0
4+0
PfaXtXt
aXtaOtaQt     pt aX'N'axtaotaQt
PfY,
PfY,
4 □ ►   4 flP ► 4
Unit of Economic Modelling
Nominal shares
Unit of Economic Modelling        G3 Model
Nominal shares
Unit of Economic Modelling        G3 Model
Another Example - nominal rigidities
J 0.4 (1.6Q) X0.6(2.5Q) C0.65 (2.9Q) G 0.75 (4Q)
1
Exchange rate   | Foreign prices
1 Exogenous ] Endogenous
Unit of Economic Modelling
Another Example - HBS effect
9 LoOP: 1 = EXR = EX^
• constant ToT: Px = PM, Px* = PM*
9 constant ToT: Px = PM, Px* = PM*
9 BB effect: PM = Pc - dx, PM* = Pc* - aX* 9 together
0 = EXR = ~PM* + EX-PX = Pc* - aX* + EX - (Pc - aX) 0 = EXR = ~PC* + EX - Pc + aX - aX* 0 = EXR = EXRPC + aX - aX* EXRPC = aX* -aX= EX = -2.4.
Unit of Economic Modelling
G3 Model
Another Example - regulated prices
• Regulated prices are important part of CPI inflation.
• Relative prices matter in the model.
• The inflation of regulated prices is higher than 2%.
• It implies a permanent divergence of regulated and nonregulated prices levels.
• Simple solution - we assume the same steady state growth.
• It implies the full deregulation in the steady state.
• It is implemented by regulated prices shock.
• It allows for trend in relative prices in the steady state and effects to real quantities while keeping nominal expenditure shares constant as required.
Unit of Economic Modelling        G3 Model
Risk - free rate puzzle and equity premium puzzle
• There is a gap between the average observed real interest rate and real revenue in the economy
o the model-implied real IR (discounted real economy growth) and the SS of inflation
• 73 Y = / - PY + wedgeEuier =>•        * 4 = 3 - 2 + wedgeEukr.
Unit of Economic Modelling        G3 Model
Model Behavior Via Impulse Response Analysis
• QPM
• Behavior via key gaps of macro variables
• Relatively simple story
• g3
g3 tells stories about trends, technologies, structural shocks etc. —>• better and deeper explanation
• g3 is relatively complex —>• we check impulse responses very often when analyzing the initial state, forecast, or scenarios ...
• Responses to anticipated and unanticipated shocks
Unit of Economic Modelling        G3 Model
Monetary policy shock (g3)
G3 Forecast U Summary - Yearly Averages-eps mpolicy
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	-0.5	0.4	0.1	-0.0	-0.0	-0.1
Real Consumption	%pa yoy	-0.0	0.0	-0.6	0.3	0.1	0.0	-0.0	-0.2
Real Investment	%pa yoy	0.0	0.0	0.0	0.1	-0.1	0.0	0.0	0.0
Real Import	%pa yoy	0.0	0.0	-0.4	0.6	-0.1	-0.0	0.0	0.0
Real Export	%pa yoy	0.0	0.0	-0.6	0.8	-0.2	-0.0	0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	-1.0	-0.3	0.1	0.0	-0.0	-1.3
Real GovtCons.	%pa yoy	-0.0	0.0	-0.7	0.4	0.4	-0.0	-0.1	0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	1.6	-0.0	-0.1	-0.0	-0.0	1.4
CPI inflation	%pa yoy	-0.0	-0.0	-0.4	-0.6	-0.0	0.0	-0.0	-1.0
Exchange rate	%pa yoy	0.0	0.0	-1.9	1.0	-0.3	-0.0	-0.0	-1.1
Nom. Wage	%pa yoy	0.0	0.0	-0.5	-0.6	-0.2	0.0	0.0	-1.3
Unit of Economic Modelling        G3 Model
Disinflation Shock (QPM)
• Central bank lowers target for inflation (unanticipated shock) —>■ CB must raise the interest rate to achieve a disinflation
• —>■ appreciation (—>■ fall of import prices) —>■ AD drop results in gradual worsening of output gap (because of higher real rates and appreciation)
• Second period and thereafter: Combined effect of import prices and negative output gap pull down inflation —>■ CB must begin to lower interest rates —>■ the economy settles down (lower inflation and nominal interest rates)
Unit of Economic Modelling        G3 Model
Exchange rate shock (g3)
G3 Forecast U Summary - Yearly Averages-eps uip
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	0.1	-0.2	0.1	0.0	0.0	0.1
Real Consumption	%pa yoy	-0.0	0.0	-0.2	0.1	0.1	0.0	0.0	0.1
Real Investment	%pa yoy	0.0	0.0	-0.6	0.2	0.3	0.1	0.0	0.0
Real Import	%pa yoy	0.0	0.0	0.5	-0.8	0.3	0.0	0.0	0.0
Real Export	%pa yoy	0.0	0.0	1.3	-1.6	0.3	-0.0	-0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	0.2	0.4	0.0	0.1	0.0	0.7
Real GovtCons.	%pa yoy	-0.0	0.0	0.1	0.0	-0.3	-0.0	0.1	0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	0.8	0.5	-0.1	0.0	0.0	1.2
CPI inflation	%pa yoy	-0.0	-0.0	0.4	0.2	-0.1	0.0	0.0	0.5
Exchange rate	%pa yoy	0.0	0.0	3.6	-2.6	-0.1	-0.0	0.1	0.9
Nom. Wage	%pa yoy	0.0	0.0	0.1	0.4	0.3	-0.0	-0.0	0.7
Unit of Economic Modelling        G3 Model
Exchange rate shock (QPM)
• Nominal depreciation (e.g.: asset preferences)
• —>■ 2 pressures on inflation: (i) opening positive output gap, (ii) more significantly, effects through an increase of import prices —>■ CB increases interest rate to resist inflationary pressures ...
Unit of Economic Modelling        G3 Model
Shock to habit (g3)
G3 Forecast U Summary - Yearly Averages-eps habit
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	5.2	-3.5	-1.1	-0.4	-0.1	0.2
Real Consumption	%pa yoy	-0.0	0.0	8.9	-5.5	-2.0	-0.7	-0.2	0.7
Real Investment	%pa yoy	0.0	0.0	-0.2	-0.3	-0.3	-0.0	0.1	0.0
Real Import	%pa yoy	0.0	0.0	1.1	-0.7	-0.4	-0.2	0.0	0.0
Real Export	%pa yoy	0.0	0.0	-0.5	0.6	0.1	-0.1	0.1	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	9.5	-5.4	-2.1	-0.7	-0.2	1.3
Real GovtCons.	%pa yoy	-0.0	0.0	8.7	-5.5	-1.6	-0.6	-0.3	0.6
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	0.7	0.6	0.1	0.1	0.1	1.9
CPI inflation	%pa yoy	-0.0	-0.0	0.3	0.2	-0.1	0.0	0.0	0.6
Exchange rate	%pa yoy	0.0	0.0	-0.7	1.6	0.3	-0.0	-0.0	0.7
Nom. Wage	%pa yoy	0.0	0.0	-0.2	0.0	0.3	0.2	0.1	0.7
Unit of Economic Modelling        G3 Model
< □ M|J M š M š ►       -š -O^O
AD shock (QPM)
• A positive shock to output gap (without a direct model reference to GDP components) —>■ upward pressure on inflation
• —>■ CB reacts immediately and raises the interest rate -appreciating currency
• A quick reaction, inflation is below target before direct influence from excess demand (due to import prices channel), then jumps upward due to demand effects
Unit of Economic Modelling        G3 Model
Costpush shock - Aggregate supply shock (g3)
G3 Forecast U Summary - Yearly Averages-eps costpusliC
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	0.3	-0.2	-0.1	0.0	0.0	0.1
Real Consumption	%pa yoy	-0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.2
Real Investment	%pa yoy	0.0	0.0	0.1	-0.1	-0.0	-0.0	-0.0	0.0
Real Import	%pa yoy	0.0	0.0	0.1	-0.1	-0.1	0.1	-0.0	0.0
Real Export	%pa yoy	0.0	0.0	0.1	-0.1	-0.1	0.1	0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	0.8	0.1	0.0	0.0	0.0	1.0
Real GovtCons.	%pa yoy	-0.0	0.0	0.6	-0.5	-0.3	0.1	0.1	0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	0.2	-0.0	0.0	0.0	0.0	0.3
CPI inflation	%pa yoy	-0.0	-0.0	0.7	0.0	0.0	0.0	-0.0	0.8
Exchange rate	%pa yoy	0.0	0.0	0.5	0.3	-0.0	0.1	0.0	0.9
Nom. Wage	%pa yoy	0.0	0.0	0.3	0.6	0.2	-0.0	-0.0	1.0
Unit of Economic Modelling        G3 Model
Costpush shock - Aggregate supply shock (g3)
• t costpushC -> t dot cpi -> t i -> j dot pY dot pN -> | dot g^jtbal^jb^j prem -> | dot s
Unit of Economic Modelling        G3 Model
Aggregate supply shock (QPM)
• A positive shock to prices (via a residual in the Phillips curve)
• —>■ CB increases the interest rate —>■ appreciation of exchange rate largely offsets the shock via import prices
• Negative output gap is closing with easing of monetary conditions
Unit of Economic Modelling        G3 Model
Regulated prices shock (g3)
G3 Forecast U Summary - Yearly Averages-eps pREG
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	-0.2	-0.1	-0.1	-0.1	-0.0	-0.5
Real Consumption	%pa yoy	-0.0	0.0	-0.6	-0.5	-0.2	-0.1	-0.0	-1.4
Real Investment	%pa yoy	0.0	0.0	-0.1	0.0	-0.0	0.0	0.0	0.0
Real Import	%pa yoy	0.0	0.0	-0.1	0.2	-0.0	-0.0	0.0	0.0
Real Export	%pa yoy	0.0	0.0	-0.2	0.3	-0.0	-0.0	0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	0.1	-0.4	-0.2	-0.1	-0.0	-0.7
Real GovtCons.	%pa yoy	-0.0	0.0	0.2	-0.0	0.0	-0.1	-0.1	0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	0.3	0.0	-0.0	-0.0	-0.0	0.3
CPI inflation	%pa yoy	-0.0	-0.0	0.7	0.1	-0.0	0.0	-0.0	0.7
Exchange rate	%pa yoy	0.0	0.0	-0.7	0.3	-0.1	-0.1	-0.0	-0.6
Nom. Wage	%pa yoy	0.0	0.0	-0.3	-0.4	-0.1	0.0	0.0	-0.7
Unit of Economic Modelling        G3 Model
Regulated prices shock (QPM)
• CB tries to prevent the increase in regulated prices spilling over into CPI inflation
• CB raises interest rates —>■ effects of appreciation on import prices are not sufficient to offset overall CPI effects (net CPI below target whereas overall CPI above target)
Unit of Economic Modelling        G3 Model
Foreign demand shock (g3)
G3 Forecast U Summary - Yearly Averages-eps Nstar
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	0.5	-0.2	-0.1	-0.0	-0.0	0.0
Real Consumption	%pa yoy	-0.0	0.0	0.1	0.1	0.0	-0.0	-0.0	-0.0
Real Investment	%pa yoy	0.0	0.0	0.4	0.3	0.0	-0.1	-0.1	0.0
Real Import	%pa yoy	0.0	0.0	1.3	-0.7	-0.2	-0.1	-0.0	0.0
Real Export	%pa yoy	0.0	0.0	2.0	-1.5	-0.4	-0.1	-0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	0.2	0.1	0.0	-0.0	-0.0	-0.1
Real GovtCons.	%pa yoy	-0.0	0.0	0.0	-0.1	-0.0	0.1	0.0	0.0
Real Eurozone Imports	%payoy	0.0	0.0	2.3	-1.5	-0.5	-0.2	-0.0	0.0
Interest rates	%pa yoy	0.0	0.0	-0.0	-0.1	-0.0	-0.0	-0.0	-0.4
CPI inflation	%pa yoy	-0.0	-0.0	0.0	-0.0	-0.0	-0.0	-0.0	-0.0
Exchange rate	%pa yoy	0.0	0.0	-0.5	-0.1	0.1	0.1	0.1	-0.1
Nom. Wage	%pa yoy	0.0	0.0	0.1	0.2	-0.0	-0.1	-0.1	-0.1
Unit of Economic Modelling        G3 Model
Foreign interest rate shock (g3)
G3 Forecast U Summary - Yearly Averages-eps Istar
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	-1.1	-0.1	0.6	0.4	0.3	0.3
Real Consumption	%pa yoy	-0.0	0.0	-2.2	-0.1	1.3	0.9	0.5	0.4
Real Investment	%pa yoy	0.0	0.0	-3.8	-0.9	2.6	2.2	1.0	0.2
Real Import	%pa yoy	0.0	0.0	0.5	-1.5	0.2	0.6	0.3	0.0
Real Export	%pa yoy	0.0	0.0	3.8	-2.1	-1.5	-0.3	-0.2	0.1
Nom. GovtCons.	%pa yoy	0.0	0.0	-1.3	1.0	1.3	0.9	0.5	2.4
Real GovtCons.	%pa yoy	-0.0	0.0	-0.9	1.2	-0.3	-0.9	0.0	0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	3.0	4.0	0.9	0.3	0.2	8.0
CPI inflation	%pa yoy	-0.0	-0.0	0.9	1.1	-0.1	-0.0	0.0	1.9
Exchange rate	%pa yoy	0.0	0.0	9.9	-2.9	-2.9	-1.8	-0.3	2.8
Nom. Wage	%pa yoy	0.0	0.0	-0.9	0.4	2.2	1.2	0.2	2.4
Unit of Economic Modelling        G3 Model
Foreign prices shock (g3)
G3 Forecast U Summary - Yearly Averages-eps Pstar
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	0.2	-0.3	0.1	0.0	0.0	0.0
Real Consumption	%pa yoy	-0.0	0.0	-0.1	-0.0	0.0	0.0	0.0	0.0
Real Investment	%pa yoy	0.0	0.0	-0.2	-0.1	0.0	0.0	0.0	0.0
Real Import	%pa yoy	0.0	0.0	0.9	-1.2	0.2	0.0	-0.0	0.0
Real Export	%pa yoy	0.0	0.0	1.7	-2.0	0.4	0.1	-0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	-0.0	0.0	0.0	0.0	0.0	0.1
Real GovtCons.	%pa yoy	-0.0	0.0	-0.0	0.0	-0.0	-0.0	-0.0	-0.0
Real Eurozone Imports	%payoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Interest rates	%pa yoy	0.0	0.0	0.1	0.1	-0.0	0.0	0.0	0.3
CPI inflation	%pa yoy	-0.0	-0.0	0.1	0.0	-0.0	0.0	0.0	0.1
Exchange rate	%pa yoy	0.0	0.0	-3.3	-0.5	-0.1	-0.0	-0.0	
Nom. Wage	%pa yoy	0.0	0.0	-0.0	0.0	0.0	0.0	0.0	0.1
Unit of Economic Modelling        G3 Model
Labour augmented technology shock (g3)
G3 Forecast U Summary - Yearly Averages-eps A
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	10.2	6.4	1.9	1.3	0.7	21.8
Real Consumption	%pa yoy	-0.0	0.0	9.4	6.5	2.1	1.2	0.7	21.5
Real Investment	%pa yoy	0.0	0.0	12.4	10.4	3.8	0.3	-0.5	22.4
Real Import	%pa yoy	0.0	0.0	12.1	6.8	2.5	1.1	0.1	22.8
Real Export	%pa yoy	0.0	0.0	12.3	4.7	1.9	1.5	0.2	22.7
Nom. GovtCons.	%pa yoy	0.0	0.0	8.6	5.7	2.5	1.4	0.7	20.7
Real GovtCons.	%pa yoy	-0.0	0.0	8.7	4.2	0.4	1.9	1.9	21.3
Real Eurozone Imports	%pa yoy	0.0	0.0	12.9	7.6	1.8	0.4	0.1	22.9
Interest rates	%pa yoy	0.0	0.0	-2.2	-2.1	0.8	0.6	0.1	-1.5
CPI inflation	%pa yoy	-0.0	-0.0	-0.8	-0.8	0.3	0.1	-0.0	-1.0
Exchange rate	%pa yoy	0.0	0.0	-2.1	-6.6	-0.0	2.3	1.0	-0.8
Nom. Wage	%pa yoy	0.0	0.0	7.5	11.1	2.3	-0.9	-0.5	21.1
Unit of Economic Modelling        G3 Model
Labour augmented technology shock (g3)
• T dotA -> t dotZ -> t dotNstar -> | n star aQ -> | bal    T b    I dots    j prem    j i    j E dots
Unit of Economic Modelling        G3 Model
<  □  ►   •« flJ ► 4
Investment specific technology shock (g3)
G3 Forecast U Summary - Yearly Averages-eps aj
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	2.9	1.1	0.4	0.2	0.1	5.0
Real Consumption	%pa yoy	-0.0	0.0	1.0	0.6	0.2	0.1	0.0	2.3
Real Investment	%pa yoy	0.0	0.0	6.3	5.4	1.5	0.1	-0.2	10.6
Real Import	%pa yoy	0.0	0.0	0.3	1.4	0.6	0.1	0.0	2.4
Real Export	%pa yoy	0.0	0.0	1.3	-0.4	0.2	0.1	0.1	2.4
Nom. GovtCons.	%pa yoy	0.0	0.0	0.9	0.5	0.2	0.1	0.0	2.2
Real GovtCons.	%pa yoy	-0.0	0.0	0.4	-0.6	-0.2	0.5	0.4	2.3
Real Eurozone Imports	%pa yoy	0.0	0.0	2.4	0.0	0.0	0.0	0.0	2.4
Interest rates	%pa yoy	0.0	0.0	-0.3	-0.3	0.0	0.0	-0.0	-0.1
CPI inflation	%pa yoy	-0.0	-0.0	-0.1	-0.1	0.0	0.0	-0.0	-0.1
Exchange rate	%pa yoy	0.0	0.0	-2.5	-1.2	0.1	0.5	0.3	-0.1
Nom. Wage	%pa yoy	0.0	0.0	0.8	1.1	0.1	-0.2	-0.1	2.2
Unit of Economic Modelling        G3 Model
< □ M|J M r M £ ►       £? -O^O
Export specific technology shock (g3)
G3 Forecast U Summary - Yearly Averages-eps aX
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	-0.1	0.1	-0.0	-0.0	0.0	0.0
Real Consumption	%pa yoy	-0.0	0.0	0.0	0.1	0.0	0.0	0.0	0.1
Real Investment	%pa yoy	0.0	0.0	-0.2	0.2	0.1	-0.0	-0.0	0.0
Real Import	%pa yoy	0.0	0.0	3.6	0.7	0.0	-0.1	0.0	4.1
Real Export	%pa yoy	0.0	0.0	3.4	0.9	-0.0	-0.1	0.0	4.1
Nom. GovtCons.	%pa yoy	0.0	0.0	0.3	0.1	-0.0	0.0	-0.0	0.4
Real GovtCons.	%pa yoy	-0.0	0.0	0.2	-0.2	-0.2	0.1	0.1	0.0
Real Eurozone Imports	%payoy	0.0	0.0	3.9	0.3	0.0	0.0	0.0	4.2
Interest rates	%pa yoy	0.0	0.0	0.2	-0.0	-0.0	0.0	-0.0	0.2
CPI inflation	%pa yoy	-0.0	-0.0	0.3	0.0	-0.0	0.0	-0.0	0.3
Exchange rate	%pa yoy	0.0	0.0	-2.9	-0.3	-0.1	0.1	0.0	-3.3
Nom. Wage	%pa yoy	0.0	0.0	0.1	0.3	0.0	-0.0	-0.0	0.4
Unit of Economic Modelling        G3 Model
Trade openness technology shock (g3)
G3 Forecast U Summary - Yearly Averages-eps aO
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.8
Real Consumption	%pa yoy	-0.0	0.0	0.0	0.0	0.0	0.0	0.0	-0.0
Real Investment	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	-0.0
Real Import	%pa yoy	0.0	0.0	21.1	14.8	4.4	1.4	0.4	42.4
Real Export	%pa yoy	0.0	0.0	21.1	14.8	4.4	1.4	0.4	42.4
Nom. GovtCons.	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	-0.0
Real GovtCons.	%pa yoy	-0.0	0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0
Real Eurozone Imports	%pa yoy	0.0	0.0	21.1	14.8	4.4	1.4	0.4	42.4
Interest rates	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
CPI inflation	%pa yoy	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0
Exchange rate	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Nom. Wage	%pa yoy	0.0	0.0	-0.0	-0.0	-0.0	-0.0	-0.0	0.0
Unit of Economic Modelling        G3 Model
Quality shock (g3)
G3 Forecast U Summary - Yearly Averages-eps aQ
		1 2	3	4	5	6	7	8	100
Real GDP	%pa yoy	0.0	0.0	0.0	-0.0	-0.0	0.0	-0.0	0.0
Real Consumption	%pa yoy	-0.0	0.0	0.0	0.0	0.0	0.0	0.0	-0.0
Real Investment	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Real Import	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Real Export	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	-0.0	0.0
Nom. GovtCons.	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Real GovtCons.	%pa yoy	-0.0	0.0	0.0	-0.0	-0.0	-0.0	0.0	-0.0
Real Eurozone Imports	%payoy	0.0	0.0	-30.2	-1.0	-0.0	-0.0	-0.0	-31.2
Interest rates	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
CPI inflation	%pa yoy	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0	-0.0
Exchange rate	%pa yoy	0.0	0.0	0.0	0.0	0.0	0.0	0.0	-0.0
Nom. Wage	%pa yoy	0.0	0.0	0.0	0.0	0.0	-0.0	-0.0	0.0
Unit of Economic Modelling        G3 Model
Comparison with QPM
• The idea is the same (Phillips curves - relation between nominal and real vars).
• But g3 is structural model (with consistent stock- flow NA), it must have 11 sectors.
• QPM is gap model, g3 filters data using the model structure.
• Because of model filtering we incorporated 'technologies' to capture trends which we do not want to model:
• oppeness tech. - to remove reexports from trend (it is not value added that is produced inside the model)
o quality - to adjust foreign demand when exports are high and ER appreciates
• regulated tech. - to describe a trend between regulated and non-regulated sector
• export sp. tech. - to capture H-B-S effect
• investment and government tech. - to impose judgments
Unit of Economic Modelling        G3 Model
Identification and interpretation of initial conditions
• Seasonal adjustment
• Structural shocks
• Measurement errors
• Structural shocks decomposition
• Interpreting news and revisions of the data
Unit of Economic Modelling        G3 Model
Seasonal adjustment
Problems with CSZO data ( GDPsa ^ Csa + Isa + Gsa + Xsa - Nsa )
10
5
0
-5
-10
-15
1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09
Unit of Economic Modelling        G3 Model
Structural shocks
The assessment of initial position of the economy via DSGE model is based on
• identification structural shocks,
• interpretation of structural shocks.
The modelling approach is used to
• analyse observed time series while allowing us
• to put more weight on the data with less noise or revision tendencies.
Unit of Economic Modelling        G3 Model
Tune of import prices
Decomposition of foreign prices growth in CZK  (%,q-o-q, annual.)
Foreign prices in Euro Exchange rate Import deflator
2000:1     2001:1     2002:1     2003:1     2004:1     2005:1     2006:1     2007:1     2008:1 2009:1
Unit of Economic Modelling        G3 Model
Measurement errors
• ME reflect our priors concerning data reliability.
• ME brings some problems in distinguishing between structural shock and measurement error.
• Even in case of ME, a significant portion of information can be used by the model.
• Another problem is that filtered vars need not match exactly raw data, so then ...
• ...we investigate factors for that discrepancy...what are models or data deficiencies.
Unit of Economic Modelling        G3 Model
Error measured investments
1 Investments	q-o-	-q growth,	observed
■ Investments	q-o-	-q growth,	measured
■40 '-1-1-T-1-1-1-1-1-1
1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09
Unit of Economic Modelling        G3 Model
Structural shocks decomposition
SSD is used
• To fully understand a story behind the observed data (if we believe that the model is plausible).
• To compare our intuition with the model dynamics.
• To find out which shocks are responsible for a deviation of a given variable from its steady state.
Unit of Economic Modelling        G3 Model
SSD example
Unit of Economic Modelling        G3 Model
Interpreting news and revisions
To understand changes in the assessment of the initial position of the economy due to
• data revisions,
• new period observations.
We use a decomposition of a given endogenous variable into observables. It is based on
• filtering apparatus (Linear Kalman filter) and on
• structure of the model (linear or log-linearized DSGE model).
Unit of Economic Modelling        G3 Model
Example of decomposition into observables
Unit of Economic Modelling        G3 Model
Projection simulation conditioned on exogenous variables and judgements
• Endogenous monetary policy - unconditional forecast
• Conditions, Exogenisation and Imposing judgements
• Modest policy interventions vs. Anticipated shocks
Unit of Economic Modelling        G3 Model
Unconditional forecast
• Forecasts are produced assuming endogenous monetary policy responses.
• MP operates via setting a trajectory for nominal interest rate in the regime of inflation targeting...
• ...in this respect our forecast is unconditional, but it is based on the initial conditions and on the assumptions of exogenous variables:
• foreign variables
• government
• inflation target
• regulated prices.
• We allowed for mixing both anticipated and fully unanticipated shocks and a persistence of shocks driving processes also matters...
Unit of Economic Modelling        G3 Model
Imposing judgments
• All forecasts are judgemental forecast (calibration of the model, filtering setup, trajectories of structural shocks), but
• we may impose judgements on the development of a particular variable by endogenizing structural shocks innovations, but....
• the question is... what shock or set of shocks to choose and whether these shocks should be treated as anticipated or unanticipated...in which periods
• A special case represents explaining of a current development of a given variable by future innovations...these must be treated as anticipated by all agents in the economy...
• A solution is not unique, we can choose the set of shocks that is the most likely...
Unit of Economic Modelling        G3 Model
Modest policy interventions vs. Anticipated shocks
• Our forecast is unconditional w.r.t a pre-specified interest rate, but fixing IR is a possible alternative.
• Simulating constant nominal interest rate by its exogenizing and endogenizing monetary policy shocks assuming unanticipated innovations is not in line with rational expectations, on the other hand
• Same exercise with anticipated innovations is an interesting simulation option (s.c. credible announcement).
• Agents understand that whatever will happen it is going to be buffered by a monetary policy shock.
Unit of Economic Modelling        G3 Model
Scenario analysis and forecast dynamics decomposition
• Decomposition w.r.t. steady states
• Decomposition of alternative forecasts
• Analysis of two successive forecasts
Unit of Economic Modelling        G3 Model
<  □  ►   •« flJ ► 4
Scenarios analysis and forecast dynamics decomposition
• Scenario vs. Fan charts (graphs with confidence intervals)
• Scenario analysis is constructed to capture uncertainty of the produced forecast.
• Scenario analysis also serves the purpose of gaining better intuition.
• Scenarios may differ not only in alternative paths of exogenous variables but also whether and what variables are anticipated or unanticipated.
• Our decomposition tools are:
• decomposition of alternative scenarios into factors,
• analysis of sources of a difference between two successive forecast,
• dynamics decomposition of a forecast w.r.t the steady state.
Unit of Economic Modelling        G3 Model
Example of forecast analysis
2009:2 2009:3 2009:4 2010:1 2010:2 2010:3 2010:4
Unit of Economic Modelling        G3 Model
Communication of the forecast
• Transformation of technical 'model' results to 'human' speech
• Unconditional forecast
• Technology processes and structural shocks
• Natural equilibrium
Unit of Economic Modelling        G3 Model
Communication of the forecast
• All results and story can be communicated without explicit reference to a model
• Communication in a clear and transparent way is our goal.
• To avoid confusion it should be clear what questions can be answered using the model and which cannot.
The model is 'only' a tool in the forecasting process.
• External and internal aspects of communication.
Unit of Economic Modelling        G3 Model
Transformation of forecasts to human speech
Unit of Economic Modelling        G3 Model
Communication issues
• Unconditional forecast...
• Technology processes and structural shocks are used to represent many real world events, but changes in their development must be viewed in this reduced form.
• A concept of natural equilibrium can be understood as the BGP concept as well as the-fully-flexible prices concept...
Unit of Economic Modelling        G3 Model
Thank you for your attention
Related papers of the new structural model are available on :
jaromir.tonner@cnb.cz
Unit of Economic Modelling        G3 Model