capturing the linkages between real and financial variables: the global projection model for the...
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Capturing the Linkages Between Real and Financial Variables: The Global Projection Model for the Philippines
Ruperto Majuca and Joy Sinay
Real and Financial Variables
• Developments in the financial markets affect the real economy and vice-versa
• Effects on liquidity, balance sheets, and the capacity of the financial sector to perform its typical intermediation functions
• Financial accelerator, flight to quality• 2008/2009 global recession;
Philippine case
Comparison of Approaches
• Classical estimation, simultaneous equations, VAR/SVAR/GVAR
• Dynamic stochastic general equilibrium (DSGE) modeling and estimation (e.g., Majuca 2011)
• Global projection models
GLOBAL PROJECTION MODEL• Global Projection Model (GPM) aims to
integrate the world economies.• GPM will enable researchers to analyze
the effects of shocks in one country and of global shocks to home economy and to the rest of the economies integrated in the mode.
• It will give forecasters a new tool to assist them in preparing worldwide forecasts and in carrying out alternative policy simulations in the global context.
Estimation Techniques
• Calibration• Maximum likelihood• Bayesian methods (combination of
prior and data)Kalman filterMarkov Chain Monte Carlo
GPM 3 + Philippines ModelPotential Output
NAIRU
Equilibrium Real Interest Rate
GPM STOCHASTIC EQUATIONS Equilibrium Real Exchange Rate
Output Gap (Aggregate Demand / IS Curve)
Inflation (New Keynesian Phillips Curve)
BEHAVIORAL EQUATIONSPolicy Interest Rate (Taylor Type Rule)
Uncovered Interest Parity (Bilateral Real Exchange Rate)
Unemployment Rate
Equations Incorporating BLT_US
EQUATIONS INCORPORATING BLT_US
MODIFIED EQUATIONS FOR PHILIPPINESEquilibrium Real Exchange Rate
Inflation Rate
Uncovered Interest Parity
MODIFIED EQUATIONS FOR PHILIPPINESInterest Rate
VARIANCE DECOMPOSITION
May 31
Y_PH 25.94 37.27 17.4 1.53 0.68 0.69 3.35 2.17 0.82 0.58
GROWTH_PH 7.86 78.44 2.9 0.45 0.18 0.14 0.69 0.45 0.29 0.28
GROWTH4_PH 20.20 47.91 8.72 1.33 0.57 0.48 2.24 1.46 0.71 0.57
RR_PH 54.15 4.9 21.01 0.61 0.31 0.51 3.05 1.98 0.39 0.25
RESULTS
US affecting PH
Bank Lending Tightening
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
US affecting EU
Bank Lending Tightening
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
US affecting JAPAN
Bank Lending Tightening
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
US
Bank Lending Tightening
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
Japan affecting PH
INFLATION
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
EU affecting PH
INFLATION
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
US affecting PH
INFLATION
RS
Nominal Interest Rate
RR
Real Interest Rate
RESULTS
US AFFECTING PH
INTEREST RATERS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
EU affecting PH
NOMINAL INTEREST RATERS
Nominal Interest RateRR
Real Interest RateREER
Real Exchange Rate
RESULTS
Japan Affecting PH
NOMINAL INTEREST RATERS
Nominal Interest RateRR
Real Interest RateREER
Real Exchange Rate
RESULTSUS Affecting PH
NOMINAL INTEREST RATERS
Nominal Interest RateRR
Real Interest RateREER
Real Exchange Rate
RESULTS
EU affecting PH
Real Exchange RateRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
JAPAN affecting PH
Real Exchange RateRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
RESULTS
Demand ShockRS
Nominal Interest RateRR
Real Interest RateREER
Conclusions and Future Work, 1• Philippine economy receptive to
shocks from other countries• Bank lending conditions in the U.S.
affect the Philippine real economy• Estimation results detail how
conditions in U.S., EU, Japan affect domestic economy
• Interactions between the financial and real variables are important and captured by the model
Conclusions and Future Work, 2
• China incorporated in future work (five country framework)
• Oil and other important shocks may be incorporated
• Structure shift (Markov switching)
ConclusionsGPM6 database for GPM3 countries– Consumer price index– Real gross domestic product– Nominal interest rate– Nominal exchange rate– Unemployment rate– Bank lending variable for US Philippine data for Philippine block (compared
with GPM6 data for Philippines to verify)– All data are seasonally adjusted– CPI, GDP and ER are in logs
ESTIMATIONGPM6 database for GPM3 countries– Consumer price index– Real gross domestic product– Nominal interest rate– Nominal exchange rate– Unemployment rate– Bank lending variable for US Philippine data for Philippine block (compared
with GPM6 data for Philippines to verify)– All data are seasonally adjusted– CPI, GDP and ER are in logs
The Global Projection Model for the PhilippinesThank you!
DATAGPM6 database for GPM3 countries– Consumer price index– Real gross domestic product– Nominal interest rate– Nominal exchange rate– Unemployment rate– Bank lending variable for US
Philippine data for Philippine block (compared with GPM6 data for Philippines to verify)
– All data are seasonally adjusted– CPI, GDP and ER are in logs
DATA
DATA
Unemployment Rate (UNR)
Real Exchange Rate (LS)
Interest Rate (RS)
Real Consumer Price Index (LCPI)
Real Gross Domestic Product (LGDP)
Prior mean Post. meanMay7 May31
alpha1_PH 0.75 0.755alpha2_PH 0.1 0.114alpha3_PH 0.5 0.500beta_fact_PH 0.15 0.283 0.180beta1_PH 0.65 0.559 0.573beta2_PH 0.15 0.132 0.106beta3_PH 0.15 0.137 0.129gamma1_PH 0.75 0.783 0.867gamma2_PH 1.1 0.938 0.768gamma4_PH 0.5 0.442 0.521growth_PH_ss 5 4.817 4.993lambda1_PH 0.5 0.568 0.580lambda2_PH 0.4 0.350 0.580lambda3_PH 0.05 0.083 0.105lambda1_RS_PH 0.5 0.370 0.465phi_PH 0.6 0.669 0.670Pietar_PH_ss / 4.714 4.684rho_PH 0.5 0.412 0.488rr_bar_PH_ss 2 / 1.5 2.128 1.471tau_PH 0.05 0.047 0.048beta_reergap_PH 0.05 0.047 0.041chi_PH 0.05 0.051 0.050
RESULTS FROM ESTIMATION
RESULTS FROM ESTIMATION Prior Mean Post. Mean
May7 May31
standard deviation of shocksRES_PIETAR_PH 0.25 0.192 0.138RES_PIE_PH 3 3.079 3.307RES_Y_PH 0.5 0.544 0.695RES_RS_PH 0.6 1.016 0.429RES_LGDP_BAR_PH 0.2 0.295 0.155RES_G_PH 0.1 0.116 0.144RES_RR_BAR_PH 0.2 0.318 0.143RES_UNR_GAP_PH 0.6 0.853RES_UNR_BAR_PH 0.1 0.133RES_UNR_G_PH 0.1 0.089RES_LZ_BAR_PH 5 7.331 6.669RES_RR_DIFF_PH 1 0.972 0.652RES_DOT_LZ_BAR_PH 0.1 0.079 0.085
correlation of shocksRES_Y_PH,RES_G_PH 0.25 0.2409 0.257RES_LGDP_BAR_PH,RES_PIE_PH 0.1 0.1086 0.100
GPM as of May 31, 2012