Appendix: EBKL versus the Stylized Equations
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We would like to thank members of the ‘Applied Economic Modeling Group’ at the Fund for their encouragement in extending a prototype ‘Monetary Policy Model’ to deal with a richer class of policy issues that arise in open economy analysis. We thank Andrew Feltenstein and Doug Laxton for their valuable comments, and Yasmina Zinbi for her excellent assistance in formatting the paper.
The appendix discusses the relation of this stylized model to the form used in BKL (2006). Note that we have changed the definition of the exchange rate so it is expressed as the number of units of foreign currency purchased by a unit of domestic currency (so that an increase denotes an appreciation).
st, pt and qt are the logs of the nominal exchange rate, the price level, and the permanent GDP component, respectively.
In doing this we have replaced Q with Y since we are measuring the debt ratio, imports and exports to GDP rather than potential GDP.
This difference can be pronounced for a set of countries subject to a more rapid pass-through of imported goods prices into domestic consumption prices.
In BKL it and πtwere annualized quantities and π4t was the annual inflation rate