GEM is part of a burgeoning new open economy macroeconomics literature that is rapidly transforming work in international macroeconomics and finance. The strong microeconomic foundations of the new models provide an integrated way of combining aggregate supply, aggregate demand, nominal rigidities, trade, and asset markets in a single unified theoretical framework. Using such models, policies can be evaluated more satisfactorily by analyzing changes in consumer welfare. In addition, because of the inclusion of a range of economic distortions, aggregate demand policies can have permanent effects on consumption, labor participation, and investment.
This approach is providing new insights on well-established policy issues such as the desirability of alternative monetary policy rules. Even more interesting, simulations have examined questions such as the impact of increasing competition in product and labor markets that could previously only be analyzed in conjunction with costly and time-consuming microeconomic studies. These new insights explain why a number of policy institutions are developing models based on strong microeconomic foundations. GEM is in the vanguard of multicountry policy models being built using explicit microeconomic foundations, just as MULTIMOD was one of the first such policy models to be built using rational expectations.
GEM is already generating useful simulations across a range of issues, but remains a project under development. In particular, the extensions discussed in Section IV of this paper will provide further depth with regard to the modeling of fiscal policy and international asset markets, including financial frictions that have such an effect on emerging market countries. In addition, priority will be given to building a three-country model comprising one large industrial country plus some combination of additional industrial countries and/or emerging market countries within GEM’s flexible structure. Such a model would allow a wide range of issues to be examined in a unified underlying framework. At the same time, MULTIMOD will remain a useful tool for some policy work, although its use will presumably decline over time.
GEM will continue to have a highly flexible structure, in which the model will be adapted to the nature of the issue at hand. This flexibility is important to help provide insights as to the underlying theoretical connections and avoid the model becoming too much of a “black box.” Indeed, one of the strengths of a model with strong microeconomic foundations is that it helps clarify the policy debate by ensuring that the mechanisms at work are well articulated. In addition, such flexibility also makes it easier to add new features to the model, ensuring that the project remains relevant, up-to-date, and continues to garner considerable interest from the rest of the world. As an example, it would be useful to follow recent advances in academia and move away from the assumption that goods are either always traded or not to a structure in which the choice of whether to export a product depends on transportation costs and other characteristics of the good. In particular, such an extension would allow the examination of macroeconomic issues associated with trade reforms. More generally, GEM refinements will continue to be driven by developments in the broader literature and issues confronting the IMF.
A concerted effort is being made to make the model accessible to those inside and outside of the Fund. GEM is a large and complex model, and inevitably it will require an effort for people to learn how to use it. Significant resources have been put into simplifying the software used to generate GEM simulations. The modeling group has already provided training to a group of IMF economists, including several in area departments, which will help integrate the model with bilateral surveillance activities. Encouragingly, a number of the economists being hired at the IMF have used new open economy models in their doctoral work, and hence have a relatively strong background in model use. Outside of the Fund, once the GEM’s structure has stabilized and its properties been more fully investigated, the code and programs to run it will be provided free to those who wish to use the model. This approach was used successfully with MULTI-MOD, in that a range of outside groups used the model for analysis.
Given that GEM remains a project under development, it is difficult to look too far into the future. Two things, however, can be said about the future with some certainty. First, the new open economy macroeconomics literature will continue to expand rapidly. Second, GEM provides a vehicle for absorbing relevant insights from this literature into the Fund, as well as encouraging mutually beneficial interactions between the academic and policy communities.