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Appendix. Description of the Data set

Estimation is based on quarterly data on several macroeconomic and financial market variables for twenty economies over the period 1999Q1 through 2009Q4. The economies under consideration are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Spain, Turkey, the United Kingdom, and the United States. This data was obtained from the GDS database maintained by the International Monetary Fund where available, and from the CEIC database compiled by Internet Securities Incorporated otherwise. Where necessary, annual data was quadratically interpolated to the quarterly frequency.

The macroeconomic variables under consideration are the price of output, the price of consumption, the quantity of output, the quantity of domestic demand, and the prices of energy and nonenergy commodities. The price of output is measured by the seasonally adjusted gross domestic product price deflator, while the price of consumption is proxied by the seasonally adjusted consumer price index. The quantity of output is measured by seasonally adjusted real gross domestic product, while the quantity of domestic demand is measured by the sum of seasonally adjusted real consumption and investment expenditures. The prices of energy and nonenergy commodities are proxied by broad commodity price indexes denominated in United States dollars.

The financial market variables under consideration are the short term nominal interest rate, the long term nominal interest rate, the price of equity, and the nominal bilateral exchange rate. The short term nominal interest rate is measured by the three month treasury bill yield where available, and a three month money market rate otherwise, expressed as a period average. The long term nominal interest rate is measured by the ten year government bond yield where available, and a ten year commercial bank lending or deposit rate otherwise, expressed as a period average. The price of equity is proxied by a broad stock price index denominated in domestic currency units. The nominal bilateral exchange rate is measured by the domestic currency price of one United States dollar expressed as a period average.

Calibration is based on annual data extracted from databases maintained by the International Monetary Fund where available, and from the World Bank Group otherwise. Great ratios are derived from the WEO and WDI databases, bilateral trade weights are derived from the DOTS database, and bilateral equity portfolio weights are derived from the CPIS and WDI databases.

Table 1.

Parameter Estimation Results

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Note: All priors are normally distributed, while all posteriors are asymptotically normally distributed. All observed endogenous variables are rescaled by a factor of 100.

References

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1

The author gratefully acknowledges advice provided by Tamim Bayoumi and Douglas Laxton, in addition to comments and suggestions received from seminar participants at the International Monetary Fund.

2

This monetary conditions index Îi,tMCI is defined as Îi,tMCI=Îi,tFCI+θ4,2θ3,1Xi+MiYi(1MiYi)1ϕ3(L)ln𝒬̂i,t, where financial conditions index I^i,tFCI satisfies Îi,tFCI=r̂i,tL+θi,tL+θ3,2lnP^i,tSTK,pP^i,tC.

3

It can be shown that the cyclical component of the nominal effective exchanege rate lnŜi,t satisfyies lnŜi,t=ln Ŝi,tUSAj=1Nwi,jln Ŝi,tUSA, while the cyclical component of the rea1 effective ex change rate ln𝒬̂i,t satisfies lnQi,t=ln Qi,tUSAj=1Nwi,jln Q̂j,tUSA, where wi,j denotes the bilateral trade weight for economy i with respect to economy j, and 𝒩 denotes the number of economies. Note that lnQ̂i,t=lnŜi,t+ln P̂i,tC,fln P̂i,tC.

Monetary Policy Analysis and Forecasting in the Group of Twenty: A Panel Unobserved Components Approach
Author: Mr. Francis Vitek