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Work is underway applying the Bayesian estimation technique employed in Smets and Wouters (2002) and outlined in Schorfheide (2002) to small versions of GEM to enhance the data coherence of the model’s parameter values.
These productivity growth rates are based on data contained in the IMF’s CGER database. Emerging Asia comprises China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan.
Because the behavioral structure of the model does not yield this result on itsown, it is necessary to impose the increase in the share of imports from emerging Asia exogenously. This can be supported by the fact that industrial country firms have actively sought out production capacity in emerging Asian economies to service domestic markets. The model structure does not allow for such behavior to be captured.
However, the number of mergers and acquisition in the last half of the 1990s was similar to that in the last half of the 1980s.
Because the behavioral structure of the model does not yield this result on its own, it is necessary to impose the increase in the share of imports from emerging Asia exogenously. This can be supported by the fact that industrial country firms have actively sought out production capacity in emerging Asian economies to service domestic markets. The model structure does not allow for such behavior to be captured.
Improvements in distribution efficiency likely also occurred in the United States over this period. Adding a U.S. distribution efficiency improvement would help the model more closely replicate U.S. relative services prices and thus the U.S.-Euro area gap. In addition, the strength the dollar exhibited over the last half of the 90s and early this decade, which is not incorporated in these simulations, would have also contributed to the rise in the U.S. relative price of services seen in the data.