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CMTEA Conference, Iasu , 26 September 200 8

Wojciech Charemza , Svetlana Makarova , Yaroslav Prytula , Julia Raskina and Yulia Vymyatnina University of Leicester, UK; University College London, UK; University of Lviv, Ukraine; European University at St. Petersburg, Russia. A small forward-looking inter-country model

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CMTEA Conference, Iasu , 26 September 200 8

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  1. Wojciech Charemza, Svetlana Makarova, Yaroslav Prytula, Julia Raskina and Yulia Vymyatnina University of Leicester, UK; University College London, UK; University of Lviv, Ukraine; European University at St. Petersburg, Russia A small forward-looking inter-country model Results and some methodological reflections CMTEA Conference, Iasu, 26 September 2008

  2. Plan: • Forward-looking aspect of large models • Quick overview of LAM-4 • Simulation of the spillover effects of the Russian Dutch Disease

  3. What I won’t be talking about: • Microfoundations of the model • Estimation techniques • Dimensional reduction problem (Chudik-Pesaran augmentations) • Statistical properties of the algorithms • Policy implications

  4. Hidden assumptions of expectations models: , . Definition: The model: Hence: Fair-Taylor EP algorithm: So that:

  5. Further on: , . Fair (2003): where: But what about: ?

  6. Remedy (a sort of….) FLEA (Forward-Looking Econometric Algorithms)

  7. Advantages of FLEA • It allows for stochastic forward-looking simulation (unlike EViews and TROLL) • It’s fully embedded within GAUSS, so that it can easily be modified and expanded • It’s fast • There is no limit on simulations possibilities (unlike EViews and TROLL)

  8. Forward-looking algorithms in FLEA EViews: Fair 2003: FLEA: Where  is the non-equivalence matrix here

  9. Example:Forward-looking inter-country LAM-4 model • A three-country panel data model • Forward-looking • First layer of linkages through REER • Second layer of linkages through cross-country augmentations

  10. LAM-4 specificationfor a single country Output gap: Non-systematic inflation:

  11. LAM-4 specification Index of logs of REER: Estimable real exchange rate equation:

  12. LAM-4 specification Mirror real exchange rates equation: ,

  13. REER links in LAM-4

  14. Example of FLEA simulations • Simulation of spillovers of Russian monetary policy • Russian monetary policy: dirty float and Dutch Disease

  15. Skewed shocks • Simulated from skewed normal distribution with zero means (‘mild’ shocks) • Changes in skewness (not in mean) • Compared with ‘Extended Path’ (EViews) ‘strong’ deterministic appreciation /depreciation shocks (changes in mean)

  16. Changes of skewness of simulated REER shocks skewness coefficients 123 4 5 6 7 8 9 10 11 12 13 14 15 16 simulation period

  17. Simulated distribution of skewed shocks frequency 1 3 5 7 9 11 13 15 ( 0 0.4 1.0 0.4 0 -0.4 -1 -0.4) simulation period (skewness) -02 -0.1 0 0.1 0.2 shocks

  18. Simulated Ukrainian output % deviation, EP % deviation,FLEA EP 75% 20% 50% simulation period

  19. Related conclusions • Model-dependent forward-looking expectations are back (perhaps…) • Dutch Disease is contagious …

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