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Appendix: Data Definitions
I. Ermolaev and D. Korshunov are affiliated with the Bank of Russia, C. Freedman with Carleton University, Ottawa, Canada, and M. Juillard with the Bank of France and CEPREMAP. The authors wish to thank Jeannine Bailliu, Patrick Blagrave, Olivier Blanchard, Jorge Canales, Don Coletti, Charles Collyns, Jörg Decressin, Roberto Garcia-Saltos, Marianne Johnson, Simon Johnson, Alin Mirestean, James Rossiter, Larry Schembri, Kadir Tanyeri and colleagues at other policymaking institutions for encouraging us to do this work. We also gratefully acknowledge the invaluable support of Heesun Kiem and Susanna Mursula in research assistance, and of Laura Leon in the preparation of this paper. The views expressed here are those of the authors and do not necessarily reflect the position of the International Monetary Fund. The DYNARE estimation programs used in this paper can be accessed from www.douglaslaxton.org. Correspondence: email@example.com.
See Meyer (2000) for a discussion of the dynamics resulting from this type of shock, which not only reduced inflation pressures but also increased aggregate demand as the expected higher productivity growth led to increases in stock market values and higher perceived permanent incomes.
See Berg, Karam, and Laxton (2006a,b) for a description of the basic model as well as Epstein and others (2006) and Argov and others (2007) for examples of applications and extensions. Currently, there are several country desks at the Fund using the model to support forecasting and policy analysis and to better structure their dialogue with member countries. A number of inflation-targeting central banks have used similar models as an integral part of their Forecasting and Policy Analysis Systems—see Coats, Laxton and Rose (2003) for a discussion about how models are used in inflation-targeting countries,
The use of the rate of inflation three quarters in the future follows Orphanides (2003). We also experimented with the change in the output gap in the reaction function, but it did not make a significant difference overall and consequently was dropped from the specification.
We have compared three variants of the full model – a demand variant, a supply variant, and the balanced variant used in the analysis in the text. By the choice of priors on the the standard errors of the disturbance terms in the various equations, movements of the model variables can be treated as coming largely from demand shocks (the demand-side model), as coming largely from supply shocks (the supply-side model), or as coming from a world in which both demand and supply shocks play a prominent role (the balanced model). We have also compared the results from the full four equation model with those from univariate and bivariate models of the output gap and the unemployment gap. For access to the code for all of these cases see www.douglaslaxton.org. The web site also provides examples using maximum likelihood estimation to show why classical estimation procedures break down in small samples.
See, for example, Bernanke and Gertler (1995). Interestingly, the perceived structural change in the way the economy operates has given rise to renewed interest in models of the business cycle from the prewar period in which real factors and financial factors other than central bank actions played a key role. See Laidler (2003).
See Lown, Morgan, and Rohatgi (2000), Lown and Morgan (2002), Lown and Morgan (2006), Swiston (2008), and Bayoumi and Melander (2008) for earlier attempts to assess the effects of financial-real linkages.
Question 1a on C&I loans or credit lines to large and middle-market firms, question 1b on C&I loans or credit lines to small firms, question 8 on commercial real estate loans, and question 10 on mortgage loans to purchase homes.
By significant we mean the shocks that account for at least 10 percent of the variation in the stationary variables of the model.