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PAULA R. DE MASI

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Artis M. J.

Abstract

Recent developments in the sphere of international economic policy coordination produced an agreement at the May 1986 Tokyo Summit that the major countries should focus on a set of economic indicators as a means of strengthening the degree of cooperation in macroeconomic policymaking already in existence. The Fund was given the formal responsibility for carrying this suggestion forward. In the subsequent development of this idea (see. in particular, Crockett and Goldstein (1987)), emphasis has been given to a taxonomy of indicators of current economic developments, distinguishing those which are signals of policy posture from those which measure intermediate variables, and which in turn are distinguished from those measuring economic performance. Indicators may be used in a number of ways. On a rising scale of increasing international interdependence, they may provide individual countries with a checklist of variables against which to monitor the short-run progress of their economies; they may provide information on the medium-run sustainability of policies; and they may signal in a formal way the need for multilateral discussion of policies.

Masson Paul, Mr. Steven A. Symansky, Mr. Richard D Haas, and Mr. Michael P. Dooley

Abstract

MULTIMOD (MULTI-region econometric MODel) has been designed to improve the analysis of the effects of industrial country policies on major macro-economic variables, both in the developed and developing worlds.1 It is a continuation of modeling work undertaken at the Fund in recent years, in particular work on the World Trade Model (Spencer (1984)) and MINIMOD (Haas and Masson (1986)), and it supplements individual country and sectoral models, as well as detailed analysis and monitoring performed by country economists. The focus of the model is on the transmission of policy effects, and in this respect therefore it accords well with the Fund’s surveillance over the policies of major countries. More generally, the model can be used to trace the effects of changes in the external environment on the economies of developed and developing countries. To a limited extent, the model can also be used to evaluate policies that developing countries might choose in order to improve their outcomes, for instance, through shifting demand away from consumption and toward investment. However, their monetary and fiscal policy instruments are not at present explicit in the model. The model has not been designed to make unconditional or “baseline” forecasts, nor will it be used for this purpose. Instead, the model has been designed to develop a judgmental baseline forecast that incorporates the detailed knowledge of country economists, and to examine the effects on that baseline of scenarios that involve changes in policies in major countries and other exogenous changes in the economic environment.

Ms. Huidan Huidan Lin
This paper discusses the risks of stagnation over the medium term in the euro area. It examines the consequences of longer-term growth trends that predate the crisis and the progress made in addressing the crisis legacies of high unemployment and debt. The paper illustrates in a downside scenario, how low potential growth and crisis legacies leave the euro area vulnerable to a negative shock that tips the economy into a prolonged slowdown.
International Monetary Fund
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Mr. Michael J. Artis
This paper analyzes the short-term forecasts for industrial and developing countries produced by the International Monetary Fund, and published twice a year in the World Economic Outlook (WEO). For the industrial country group, the WEO forecasts for output growth and inflation are satisfactory and pass most conventional tests in forecasting economic developments, although forecast accuracy has not improved over time, and predicting the turning points of the business cycle remains a weakness. For the developing countries, the task of forecasting movements in economic activity is even more difficult and the conventional measures of forecast accuracy are less satisfactory than for the industrial countries.
Michal Andrle, Mr. Alvar Kangur, and Mr. Mehdi Raissi
This paper seeks to quantify the net benefits of a comprehensive reform package aimed at addressing Italy’s inter-related challenges. Specifically, it simulates the growth and competitiveness effects of a package of fiscal, financial, wage bargaining, and other structural reforms. Credible implementation of such a package yields substantial mediumterm dividends at negligible near-term growth costs. Real GDP growth is estimated to be substantially higher over the medium term, while the real effective exchange rate depreciates notably.
Mr. Alvar Kangur
The growth of Italian exports has lagged that of euro area peers. Against the backdrop of unit labor costs that have risen faster than those in euro area peers, this paper examines whether there is a competitiveness challenge in Italy and evaluates the framework of wage bargaining. Wages are set at the sectoral level and extended nationally. However, they do not respond well to firm-specific productivity, regional disparities, or skill mismatches. Nominally rigid wages have also implied adjustment through lower profits and employment. Wage developments explain about 45 percent of the manufacturing unit labor cost gap with Germany. In a search-and-match DSGE model of the Italian labor market, this paper finds substantial gains from moving from sectoral- to firm-level wage setting of at least 3.5 percentage points lower unemployment (or higher employment) rate and a notable improvement in Italy’s competitiveness over the medium term.
Mr. Guy M Meredith
The medium-term predictability of exchange rate movements is examined using three models of fundamentals: purchasing power parity, the monetary model, and uncovered interest parity. While the first two approaches yield favorable in-sample results, these largely reflect finite-sample estimation biases. Adjusting for these biases, there is little evidence of predictability, consistent with the lack of systematic improvement in out-of-sample forecasting performance relative to a random walk. Uncovered interest parity fares better at long horizons, but reflects information already embodied in market prices; in this sense, it may not be useful as an indicator of exchange rate misalignment. While more elaborate models of fundamentals might have better medium-term forecasting properties, careful attention must be paid to finite-sample biases in assessing predictability.
Mr. Olivier Coibion and Mr. Yuriy Gorodnichenko
We propose a new approach to test the full-information rational expectations hypothesis which can identify whether rejections of the arise from information rigidities. This approach quantifies the economic significance of departures from the and the underlying degree of information rigidity. Applying this approach to U.S. and international data of professional forecasters and other agents yields pervasive evidence consistent with the presence of information rigidities. These results therefore provide a set of stylized facts which can be used to calibrate imperfect information models. Finally, we document evidence of state-dependence in the expectations formation process.