GEM: A New International Macroeconomic Model

Bayoumi, Tamim; Faruqee, Hamid; Laxton, Douglas; Karam, Philippe; Rebucci, Alessandro; Lee, Jae Woo; Hunt, Ben; Tchakarov, Ivan

doi:10.5089/9781589063754.084

Cited by 70 publications

(54 citation statements)

References 17 publications

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“…Second, it can make the convergence process smoother and avoid sudden rebalancing of the current account. 3 In this paper we assess to which extent the trade balance improves in correspondence to a temporary fiscal devaluation enacted by a country in the euro area. We initially simulate the implementation of the fiscal devaluation in Spain or Portugal.…”

Section: Introductionmentioning

confidence: 99%

Fiscal devaluation in the euro area: A model-based analysis

2016

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In 2014 all ECB publications feature a motif taken from the €20 banknote.NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB. Sandra GomesBank of Portugal; e-mail: sandra.cristina.gomes@bportugal.pt Pascal JacquinotEuropean Central Bank; e-mail: pascal.jacquinot@ecb.int Massimiliano PisaniBank of Italy; e-mail: massimiliano.pisani@bancaditalia.it AbstractWe assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables. JEL Classification Numbers: F32; F47; H20.Keywords: fiscal devaluation; trade deficit; dynamic general equilibrium modeling. ECB Working Paper 1725, August 2014 1Non-technical Summary A country belonging to a monetary union cannot rely on nominal exchange rate devaluation to increase, in presence of nominal price rigidities, its international relative price competitiveness and, hence, improve in the short run its trade balance. An alternative way to increase the short-run international price competitiveness is through a temporary "fiscal devaluation", defined as the combination of two fiscal measures: the decrease in social contributions paid by employers and the increase in consumption tax.The reduction in employers' social contributions reduces the unit labor costs. As long as the latter are passed-through into final prices, the improvement in price competitiveness favors exports and reduces imports. The reduction in contributions is financed by increasing the consumption tax, which is also a destination-based tax. As such, it raises the after-tax price of domestic and imported goods uniformly, but not the price of exported goods. Overall, the combination of lower unit labor costs and higher consumption tax decreases the price of exported goods and increases the after-tax relative price of the imported good.In this paper we assess the trade balance improvement in correspondence of a tem- lower than in the case on unilateral devaluation, as tradable goods produced in the rest of the euro area are now more competitive than in the case of unilateral devaluation. Ex-

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Section: Introductionmentioning

confidence: 99%

Fiscal devaluation in the euro area: A model-based analysis

2016

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“…It includes Germany, the rest of the euro area (which are both in a monetary union), the US and the rest of the world. EAGLE, based on the NAWM (Coenen et al, 2008b), is also in the vein of the other international models such as GEM (Bayoumi et al, 2004) or SIGMA (Erceg et al, 2006). Thus, the new open economy macroeconomics paradigm constitutes its theoretical background.…”

Section: Eagle and Its Extensionmentioning

confidence: 99%

Can We Prevent Boom-Bust Cycles During Euro Area Accession?

2014

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“…Some of the recent medium-scale models developed by policy institutions, built on those early examples, include the New Area Wide Model developed at the ECB (see, e.g., Coenen, McAdam and Straub (2006)) , the SIGMA model of the Board of Governors (Erceg, Guerrerri and Gust (2006)), and the GM model developed by the IMF (Bayoumi (2004)). …”

Section: Extensions and New Directionsmentioning

confidence: 99%

Macroeconomic Modeling for Monetary Policy Evaluation

Galı́

Gertler

2007

Journal of Economic Perspectives

169

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We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key di¤erences with respect to the earlier generation of macro models, and highlight the insights for policy that these new frameworks have to o¤er. Our discussion emphasizes two key aspects of the new models: the signi…cant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy. In the 1980s and 1990s, many central banks continued to use reduced form statistical models to produce forecasts of the economy that presumed no structural change, but they did so knowing that these models could not be used with any degree of con…dence to generate forecasts of the results of policy changes. Thus, monetary policy-makers turned to a combination of instinct, judgment, and raw hunches to assess the implications of di¤erent policy paths for the economy. Romer (1991)). The models of this literature, however, were typically static and designed mainly for qualitative as opposed to quantitative analysis.By contrast, real business cycle theory, which was developing concurrently, demonstrated how it was possible to build quantitative macroeconomic models exclusively from the "bottom up"-that is, from explicit optimizing behavior at the individual level (e.g. Prescott (1986)) These models, however, abstracted from monetary and …nancial factors and thus could not address the issues that we just described. In this context, the new frameworks re ‡ect

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GEM: A New International Macroeconomic Model

Cited by 70 publications

References 17 publications

Fiscal devaluation in the euro area: A model-based analysis

Fiscal devaluation in the euro area: A model-based analysis

Can We Prevent Boom-Bust Cycles During Euro Area Accession?

Macroeconomic Modeling for Monetary Policy Evaluation

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