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Appendix I. Complete Model Equations For GPM+
Appendix II. Data Sources
Appendix III. Estimation Method
Appendix IV. Shocks Added to the Estimated GPM+ in the Simulations
The authors are grateful for helpful comments from Alan MacArthur, Hassan Al-Atrash, and participants in the seminar held at the Central Bank of Egypt in January 2011.
See Carabenciov et. al. (2008) for a detailed summary of the evolution of GPM, Canales-Krijenko et. al. (2009) for its extension to Latin America, and Andrle et al. (2009) for its extension to Indonesia.
The reduced form equations are somewhat different in that GPM incorporates some lagged effects, especially in the Philips Curve, to capture inflation indexation and backward looking expectations.
In the growth accounting exercise, capital stock is estimated following the Perpetual Inventory Method, with 5 percent depreciation rate and 33 percent of the share of capital. Using different parameters, however, does not change the main findings of the analysis, where human capital is estimated following Collins and Bosworth (1996).
See “The Core inflation Measure,” a CBE’s brochure on the core inflation.
The real effective exchange rate gap is given by zt‒1 = ∑jωjzj,t‒1 where ωj are the weights of different bilateral exchange rates. These weights are calculated using the trade shares of Egypt with the different regions that exist in GPM. Currently the shares are: United States (0.14), EU (0.33), Japan (0.05), Emerging Asia (0.13), LA (0.02), others (0.33).
The foreign output gap is a weighted average of the output gaps of the small open economy’s main trading partners (yf,t‒1 = ∑jωjyj,t‒1).
This model assumes that the bank’s target and policy rule is known and that it is credible.
In future work, we would like to incorporate the effects of administered prices and commodity prices (especially food) into the model.
In this section, GPM+ is rewritten so that all variables are defined as deviation from the steady state because of computational capacity of Dynare.