Acta Universitatis Danubius. Œconomica, Vol 12, No 5 (2016)
A Bayesian Approach for the Analysis of Macroeconomic Dynamic in Case of Emerging Countries-Monetary and Fiscal Policy Model
Georgiana-Alina Ionita1
Abstract:The paper proposes the analysis of the main drivers of the economic growth in Central and Eastern Europe, in three emerging countries: Czech Republic, Hungary and Poland, with a development stage similar with that of Romania. Given the vulnerabilities of the Central and Eastern Europe region at the beginning and during the recent global economic and financial crisis, there is an increased interest to identify the models that can describe the principalcharacteristics of the Central and Eastern Europe macroeconomic variables: gross domestic product, investment, wages and salaries, inflation, hours worked, consumption and themonetary variable- interest rate. Moreover, another scope is to analyze the frictions that describe the evolution of the seven data series, as the stochastic dynamic of the macroeconomic model is driven by orthogonal structural shocks.
Keywords:monetary; policy; frictions; shocks
JEL Classification: C01; D50; B22; C4.
1. Introduction
I have proposed to analyze in the current thesis the degree in which the model responses to the requests of the Central and Eastern Europe economies, based on a study completed for the following countries: Poland, Hungary and Czech Republic. In this purpose I have used a Bayesian approach for the estimation of this forward-looking model, in a general equilibrium framework.
The current model is not a simple monetary policy model, involving also the fiscal policy, so it can be analyzed taking into account the policy shocks involved: price and interest rate shocks (as monetary policy shocks) and also the exogenous spending shock (which includes together with net exports also the government spending, instrument of the fiscal policy).
So, the model which is an improvement and a simplified version of the one proposed by the authors Frank Smets and RafWouters in 2003 in the article “An Estimated Stochastic Dynamic General Equilibrium Model for the Euro Area has the purpose to analyze the main drivers of the economic growth, putting an eye on the frictions of these four economies (seven frictions- reduced to the number of the seven observed variables).
As a result, the research proposes an overview of the dynamic of monetary policy that should be conducted in the face of multiple sources of uncertainty, including model and parameter uncertainty as well as uncertainty about future shocks.
2. The Non-Linear Model
2.1. Producers
The
product with destination of final consumption,
,is
composed of good for intermediate consumption,
that are bought by final good producers, grouped into
and
sold in a perfectly competitive market.
They maximize the profit obtained, as per maximization function:
Max
,
s.t.
(
),
,
are
the prices of goods for final consumption and for intermediate
consumption and G is a function having the characteristic of being
strictly concave on one hand and being an increasing function on the
other hand, with the property: G(1)=1.
istheprice
mark-up shock,
and follows and exogenous ARMA processln
.
2.2. Intermediate Goods Producers
The producers of goods with the destination of intermediate consumption follow the technology equation:
Y
(i)=
-
,
represents
capital in services form,
represents the input of labor, while
is
a fixed cost.
represents
the labor growth rate and
represents the shock of the productivity factor and is defined as:
ln
.
The
profit of any firm from the economy follows the following equation:
-
,
represents nominal wage or salary rate and
represents
the capital rental rate.
The
model assumes that firms are able to adjust prices used with
probability 1-
in each period.
The resulting price that is optimal is obtained from the following maximization function:
Max
(
s.t.
.
represents
firms probability of price adjustment,
is
inflation defined as
=
is
the discount factor for firms,
=
and
Theindex of prices obtained has the following equation form:
P
=(1-
.
2.3. Households
Households
in order to maximize utility function are able to choose final
consumption
,
the number of working hours
,
acquisition of bonds
,capital
investment
and
capital utilization
.The
utility function is as follows:
,
related to the following equation of the budget:
Capital
at moment “t” has the following form:
,
represents
the stochastic premiumresulted frominvestment in bonds,
follows
the stochastic process: ln
=
,
where,
has
the significance ofrate of depreciation, S(.) is a function for
quantifying the cost adjusting, with S(
)=0,
S’(
)=0, S’’(.)>0.
illustrates
the shock of investment component and is described by the equation:
ln
=
.
represents
taxes, while
represents the dividends for distribution.
2.4. Intermediate labor and labor packers
Households
provide their labor forthe intermediate labor union, the labor
provided having the following form:
.
(16)
Labor packers are those who acquire labor from unions and distribute the labor to producers of intermediary goods. Their maximization profit function has the following form:
Max
, s.t.
(
)
,where
and
represent the price of total and for intermediary labor services ,
while H is a function strictly concave , which follows H(1)=1 and is
increasing.
is
an exogenous shocks of wages mark-up,
and
has the form of an
ARMA process:
From the first order conditions of the labor packers, we obtain:
.
Combining this condition with the zero profit condition we obtain an expression for the wage cost for the intermediate goods producers:
,
where
is
defined as an ARMA process:
ln
=
.
The dividends that are received by households from labor unions are included in the constraint of budget for households:
In
case of unions there are also nominal rigidities as proposed by Calvo
(1983), more precisely wages being adjusted with the probability of
1-
.
In
case of unions who readjust wages, the optimization rule consists of
choosing a wage
in order to maximize subsequent wage income in case when unions keep
this fixed wage.
The expression of aggregate wageobtained is:
.
2.5. Monetary policy and government budget constraint
The interest rate established by central bank by taking into account the deviation of output and inflation from the targeted levels is as follows:
.
is
the value of nominal interest rate at steady-state and
is
the natural gross domestic product.
The
parameter
represents
the interest ratesmoothness, while the definition of the shock of
monetary policy,
, is:
.
The
constraint of government budget is described as follow :
.
represents
the nominal lump-sum taxes and the government spending in relation
with the steady-state output
follows
the process:
.
3. The Linearized Model
The
aggregate constraint for the linearized model is described as
follows: (1)
,
The
interpretation of the resource constraint is that gross domestic
product (
)
is absorbed by investment (
),
consumption (
),
capital utilization costs (expressed in relation to the capital
utilization rate (
)
and the exogenous spending shock (
)).
In addition,
is
the state-state share of consumption in output and is equal to
,
where
and
are
the steady-state exogenous spending-output ratio and
investment-output ratio.
In
addition,