Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 3 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 4 https://isni.org/isni/0000000404811396, International Monetary Fund

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Appendix: GPM Data Definitions

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1

C. Freedman is Scholar in Residence in the Economics Department, Carleton University, Ottawa, Canada. The authors wish to thank Olivier Blanchard, Charles Collyns, Ondra Kamenik, Robert Rennhack and our colleagues at other policymaking institutions for encouraging us to do this work. We also gratefully acknowledge the invaluable support of Heesun Kiem, Ioan Carabenciov, Susanna Mursula, Carolina Saizar, Ben Sutton and Laura Leon. The views expressed here are those of the authors and do not necessarily reflect the position of the International Monetary Fund or Bank of Indonesia. Correspondence: dlaxton@imf.org.

1

This section is largely based on Goeltom, 2007, chapters 3 and 5 and Bank Indonesia Annual Reports (2003 through 2007).

2

In addition to giving rise to higher standards of living, higher potential output growth would permit more rapid aggregate demand growth without creating inflationary pressures.

3

See Botman and others (2007) for a summary of the applications using these models.

4

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, Fund staff are 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 such models are used in inflation-targeting countries.

5

Data definitions are provided in the appendix to this paper.

6

More accurately, each non-U.S. economy has an exchange rate vis-à-vis the U.S. dollar. So if there are N economies in the model, there will be N-1 exchange rates.

7

In a future version of the model, we plan to use a weighted average of lagged and contemporaneous foreign output gaps in the domestic output gap equation.

8

The way that the shares are computed assumes that Indonesia trades only with the United States, the euro area and Japan. Of course, this is far from the case in actuality and use of the current model for forecasting will have to adjust for the absence of Indonesia’s other important trading partners. When the basic model is extended to include some of the other important economic areas, such as China, this problem will become less important for the model.

9

Alternatively, one can code the real exchange rate gap of the United States versus country i in the same way as the other real exchange rate gaps, i.e., as zus - zi, and then define zus to be equal to zero.

10

As was the case in the earlier multi-country paper, the disturbance to the inflation equation was entered with a negative sign in order to facilitate the estimation of the cross correlations.

11

The use of the rate of inflation three quarters in the future follows Orphanides (2003).

12

While the economics of the UIP equation is most easily understood as expressed in the text, the coding of the model is as follows: (Ri,tRus,t)=4(Zi,t+1eZi,t)+(R¯i,tR¯us,t)+εi,tRiRus. The only difference between the two versions is that the impulse response function for shocks to this equation would reflect the form of the disturbance shown in this footnote, which is the negative of the disturbance shown in the text.

13

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 interwar period in which real factors and financial factors other than central bank actions played a key role. See Laidler (2003).

14

More detail on the postwar history of financial-real linkages can be found in the three earlier papers in this series.

15

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.

16

Bayoumi and Swiston (2007) use VARs to try to achieve the same objective.

17

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.

18

In the earlier papers the disturbance term was entered with a negative sign to simplify the US cross correlations, and the same specification has been maintained for this paper.

19

It could, however, affect borrower behavior.

20

Recall that, as discussed in an earlier footnote, while the economics of the UIP equation is most easily understood as expressed in the text, the coding of the model puts the interest rate differential on the left-hand side of the equation.

21

See Alichi and others (2008). This type of endogenous credibility model has also been extended to the Indonesian economy.

22

For example, in a two country model, if the variance decomposition showed that a shock to the output gap equation of the large country had a smaller effect on the output gap of the small country than the reverse, considerable doubt would be thrown on the validity or usefulness of the model results.

24

Note, however, that because of the specification of the equation, the response of interest rates to an increase in forecast inflation, π4i,t+3, is γ2 plus 1. The stability requirement that the response of the rate of interest to an increase in the rate of inflation must exceed unity is easily met in all the economies.

25

The impulse responses are computed using a Cholesky decomposition of the covariance matrix of the exogenous shocks using the same ordering as in Carabenciov and others (2008b).

Adding Indonesia to the Global Projection Model
Author: Mr. Roberto Garcia-Saltos, Mr. Douglas Laxton, Michal Andrle, Haris Munandar, Charles Freedman, and Danny Hermawan