This appendix has four main sections providing further details regarding some of our main results. First, we present a detailed description of the structural dynamic stochastic general equilibrium (DSGE) model that underpins our quantitative results. The next two sections discuss model estimation and sensitivity analysis, while the fourth section sheds further light on model dynamics, and the final section presents the counterfactual simulations using the time series of year-over-year growth rates.
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Harun Alp is with the Central Bank of the Republic of Turkey. The views expressed in this working paper are those of the authors and do not necessarily represent those of any institution the authors are or have been affiliated with.
For a model which investigates possible refinements to an inflation targeting framework by incorporating financial stability considerations focusing on Korea, see Aydin and Volkan (2011).
In terms of theory, our model brings together elements from papers including Adolfson and others (2007), Bernanke and others (1999), Elekdag and Tchakarov (2007), and Gertler and others (2007) among many others, while, in order to facilitate estimation, we build on the work of Smets and Wouters (2003, 2007) and Elekdag and others (2006). For a recent example, see Alp and Elekdag (2011).
Note that this shock actually consists of two components: the first is the exogenous component discussed above. The second component is actually endogenous and depends on the levels of debt outstanding thereby accounting for sovereign risk (in line with other recent open-economy DSGE models, see Appendix for further details).
We follow Gertler and others (2007) and also use domestically-denominated debt when modeling the financial accelerator. Given the risks associated with foreign currency-denominated debt, adding this feature as in Elekdag and Tchakarov (2007) is a refinement worth pursuing in future research.
Further details, including impulse response analysis of the other structural shocks are available from authors upon request.
Just as the model-based framework assumes that the inflation targeting regimes are fully credible, it also assumes that the exchange rate regimes are fully credible. While the latter assumption is harder to justify, the credibility of both regimes is needed for comparability. For a lack of a better term, credibility was used, but perhaps sustainability is a more related or even more appropriate characterization.
All results are available from the authors’ upon request.
See IMF 2009 staff report for details of the authorities’ comprehensive policy responses: http://www.imf.org/external/pubs/cat/longres.aspx?sk=25139.0.
Specifically, IFS codes 54260…ZF… and 54260BC.ZF…, respectively for the discount and corporate bond rates, where 542 is Korea’s IFS country code.
Additional information on our estimation results including, for example, kernel density estimates for the posteriors, together with the priors are available from the authors upon request.