An Open Economy Quarterly Projection Model For Sri Lanka

This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka’s move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.

This paper outlines the key features of the production version of the quarterly projection model (QPM), which is a forward-looking open-economy gap model, calibrated to represent the Indian case, for generating forecasts and risk assessment as well as conducting policy analysis. QPM incorporates several India-specific features like the importance of the agricultural sector and food prices in the inflation process; features of monetary policy transmission and implications of an endogenous credibility process for monetary policy formulation. The paper also describes key properties and historical decompositions of some important macroeconomic variables.

Belarusian authorities contemplate transiting to inflation targeting. The paper suggests a small structural model at the core of the forecasting and policy analysis system. A well-researched canonical structure of Berg, A., Karam, P. and D. Laxton (2006) is extended to capture specifics of Belarusian economy and macroeconomic policy. The modified model’s policy block reflects a monetary targeting regime and allows for transition from it to an interest-rate-based framework. Adding wages, directed lending and dollarization allow for studying implications of activist wage policy, state program lending, and dollarization for macroeconomic stability and the strength of the policy transmission mechanism.

The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model’s baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.

This paper takes stock of forecasting and policy analysis system capacity development (FPAS CD), drawing extensively on the experience and lessons learned from developing FPAS capacity in the central banks. By sharing the insights gained during FPAS CD delivery and outlining the typical tools developed in the process, the paper aims to facilitate the understanding of FPAS CD within the IMF and to inform future CD on building macroeconomic frameworks. As such, the paper offers a qualitative assessment of the experience with FPAS CD delivery and the use of FPAS in the decision-making process in central banks.

Kingdom of Lesotho: Selected Issues

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Belarusian authorities contemplate transiting to inflation targeting. The paper suggests a small structural model at the core of the forecasting and policy analysis system. A well-researched canonical structure of Berg, A., Karam, P. and D. Laxton (2006) is extended to capture specifics of Belarusian economy and macroeconomic policy. The modified model’s policy block reflects a monetary targeting regime and allows for transition from it to an interest-rate-based framework. Adding wages, directed lending and dollarization allow for studying implications of activist wage policy, state program lending, and dollarization for macroeconomic stability and the strength of the policy transmission mechanism.