Economic modelling
BoE article sees benefits to agent-based modelling
“Bottom-up” approach is complementary to models that are already widely used; the Bank of England has created new models for both housing and corporate bond markets
BIS economists model benefits of leaning against the wind
Endogenous model of financial crises points to benefits of using monetary policy to lean against financial imbalances, in contrast to many other studies
Researcher uses dynamic factor model for ‘nowcasting’
Research makes three additions to widely-used model
Changing policy impact may knock forecasts askew – Riksbank economists
Economists suggest systematic errors of forecasts in recent years may reflect changes in the effectiveness of monetary policy
Poloz urges economists to create new economic models
The rise of the service sector has changed the way productivity and output can be calculated, the Canadian governor says, musing on whether the relationship between inflation and growth could change over time
Colombian paper models non-linearity in sovereign risk
Model of real exchange rates seeks to capture the non-linear effects of sovereign risk for Latin American countries
Haldane turns to other disciplines to solve big economic questions
BoE chief economist calls for an interdisciplinary approach to tackling the problems economics faces in understanding complex systems; warns of shortcomings in micro-founded models
Fed research proposes micro-founded approach to term structure modelling
Economists build structural New Keynesian model in contrast to the statistical approaches in much of the available literature, identifying key factors shaping term premiums
BoE paper takes DSGE approach to deflation probabilities
Comparing simulations using a DSGE model estimated on different market-based measures of deflation probability helps to pick out causality, researchers say
Riksbank paper shows importance of modelling bank costs
Models should not assume financial intermediation is free, authors say, showing banks can reduce aggregate welfare in some cases
BoE paper tackles ‘sectoral co-movement puzzle’
Adding labour market frictions and habit formation helps to solve the problem of models implying a monetary contraction produces little response in output
BoE paper tests agent-based model of macro-prudential policy
Researchers use agent-based model to capture diversity of behaviour between different housing market participants, pointing to risks from larger buy-to-let sector
Danish economist updates DSGE model with financial frictions
Jesper Pedersen adds imperfectly competitive banking system and housing market to improve model’s ability to explain crises
ECB paper aims to improve small-scale models for assessing policy shocks
Paper outlines a structural factor model, which the authors say better accounts for the asset price impact of monetary policy shocks
BIS research seeks to forecast global inflation
Economist builds global inflation forecast using country-level survey forecasts, finding it can be used to improve domestic inflation projections in some countries
Norges Bank paper studies forecast asymmetry at lower bound
Effective lower bound need not translate into asymmetries in other forecast variables, authors find; regime-switching DSGE model helps overcome Lucas critique
Riksbank paper offers method for tackling distorted forecast evaluation
Authors adjust for different amounts of information available, allowing them to overcome distortions in forecast evaluation
Bank of Finland looking to streamline and upgrade payments simulator
Economist sheds light on the bank’s plans for adding new features, improving efficiency and integrating agent-based modelling
Economists add to theory and empirics of economy’s non-linear dynamics
Paper by Bank of England economists finds “strong evidence” of non-linearity in UK data, while Markus Brunnermeier and Yuliy Sannikov expand theory of financial amplification mechanisms
RBNZ better at forecasting growth and inflation than exchange rate, notes study
Economists compare judgement-based forecasts with benchmark set by suite of statistical models, finding judgement tends to work well, but both types of forecast struggle with exchange rates
BoE paper finds fault with empirical methods for studying contagion
Review of spillover and contagion literature finds methods plagued by bias and heteroskedasticity, concluding no single technique is flawless, but some offer a partial solution
Climbing ‘Mount Economy’
The BIS’s quest for financial stability-oriented monetary policy throws up questions not only about decision-making but also how one should think about economics, as Claudio Borio explains
Blanchard sees reformed DSGE as ‘central’ to future of macroeconomics
Former IMF chief economist says DSGE models are “seriously flawed” but “eminently improvable”, and will have a leading role to play in the future
BoJ research uses ‘global game’ to explain zero inflation
Model of monopolistic competition implies co-ordination between firms may lead to zero inflation