An Estimated Bayesian DSGE Model for Kazakhstan

Abstract

A small scale open economy model is estimated for Kazakhstan via Bayesian methods. The model explicitly takes into account the dependence of the economy on commodity exports and also accounts for risk premium shocks in the foreign exchange market. The main contribution of the research is that it is the first DSGE model in literature estimated via Bayesian methods for Kazakhstan. The results of the model are used to determine the historical contribution of structural shocks to endogenous variables, forecast error variance decomposition of observed macroeconomic variables and impulse responses of important endogenous variables to various shocks. It has been found that the output gap turned significantly negative during the Great Recession and the negative oil price shock. The effect of contractionary monetary policy is found to be negative on output gap, but it negligibly affects the inflation rate in the economy. Risk premium shocks are found to account for almost 60% of forecast error variance decomposition of nominal exchange rate of tenge over all horizons. Contribution/ Originality: This research contributes to the literature by estimating a version of Bayesian DSGE model for Kazakhstan and explicitly modelling key characteristics of the economy. The historical decompositions of output gap and inflation rate gap are calculated to detect the fundamental sources of fluctuations in the economy.

Estimation of a small open economy DSGE model for Kazakhstan

“…(2014). The presence of the commodity sector and the fiscal block seems to play an important role, judging from the magnitude of the respective shocks' impact on the main variables -this may be one reason why, in the absence of these blocks, the risk premium shock in Abilov (2020) has such an outsized effect. One of the differences with the Medina and Soto (2007) lies in the responses of some of the key variables to the permanent productivity shock: here, the GDP growth rises initially, then falls below the steady state before rebounding in subsequent periods, converging to the steady state from above.…”

“…While a multitude of robust DSGE models have been built in the context of developed economies over the past few decades, there has been little attention devoted to emerging economies such as Kazakhstan. Abilov (2020) builds a small open economy DSGE model for Kazakhstan in the spirit of Adolfson et al (2007), which was notably fully estimated using Bayesian methods. Their model contains the main building blocks of a typical DSGE model that capture the key characteristics of the Kazakhstani economy.…”

A Medium-Scale Bayesian DSGE Model for Kazakhstan with Incomplete Exchange Rate Pass-Through

“…Therefore, our last goal is to explore the propagation mechanism of structural shocks in the model by interpreting the impulse responses of endogenous variables to various shocks. Abilov (2020) resolves that the monetary policy plays a negligible role in affecting inflation whereas we reach a reverse conclusion by using the impulse responses of endogenous variables to an unanticipated negative monetary policy shock. Konebayev (2020) constructs a DSGE model with unit root technology and introduces the oil sector in the model.…”

“…There is a paucity of literature in this direction due to the lack of quality of macroeconomic data and limited research on Kazakhstan, but the research in this area has been more active than ever for the last couple of years (e.g. Abilov, 2020;Konebayev, 2020;Algozhina, 2016). Although Abilov (2020) points out at the role of various shocks in business cycle fluctuations, the model is a small-scale version of New Keynesian models without investment and evolution of capital, which are important in explaining the propagation mechanism of monetary policy.…”

“…Abilov, 2020;Konebayev, 2020;Algozhina, 2016). Although Abilov (2020) points out at the role of various shocks in business cycle fluctuations, the model is a small-scale version of New Keynesian models without investment and evolution of capital, which are important in explaining the propagation mechanism of monetary policy. Therefore, our last goal is to explore the propagation mechanism of structural shocks in the model by interpreting the impulse responses of endogenous variables to various shocks.…”