External Shocks and Their Transmission Channels in Nigeria: A Dynamic Stochastic General Equilibrium Approach

The study examines the sources of external shocks and investigates their transmission channels in Nigeria using the trade-weighted variables from the country’s five top trading partners. Based on the assumption of the small open economy model, the study adopts the New Keynesian Dynamic Stochastic General Equilibrium Model on quarterly data between 1981 and 2018 using the Bayesian estimation technique. Findings from the study reveal that external shocks have a temporary and short-lived effect on the Nigerian economy. In addition, the article shows that oil price, foreign output, and foreign inflation shock have positive impacts on output gap and inflation, while the impact of foreign interest rate shock on the output gap and inflation is negative and not significant. The study also reveals that external shocks collectively explain 86% and 39%of total fluctuations in the output gap and inflation, respectively. Lastly, the study finds that external shocks transmit to the Nigerian economy via different channels. The study, therefore, concludes that terms of trade and exchange rate channels are the dominant transmitters of external shocks in Nigeria. Based on the findings from the study, important policy implications are highlighted.

Forecasting for the Optimal Numbers of COVID-19 Infection to Maintain Economic Circular Flows of Thailand

We evaluated the movement in the daily number of COVID-19 cases in response to the real GDP during the COVID-19 pandemic in Thailand from Q1 2020 to Q1 2021. The aim of the study was to find the number of COVID-19 cases that could maintain circulation of the country’s economy. This is the question that most of the world’s economies have been facing and trying to figure out. Our theoretical model introduced dynamic stochastic general equilibrium (DSGE) models with a special emphasis on Bayesian inference. From the results of the study, it was found that the most reasonable number of COVID-19 cases that still maintains circulation of the country’s economy is about 3000 per month or about 9000 per quarter. This demonstrates that the daily number of COVID-19 cases significantly affects the growth of Thailand’s real GDP. Economists and policymakers can use the results of empirical studies to come up with guidelines or policies that can be implemented to reduce the number of infections to satisfactory levels in order to avoid Thailand lockdown. Although the COVID-19 outbreak can be suppressed through lockdown, the country cannot be locked down all the time.

Mortgage debt and time-varying monetary policy transmission

This paper studies the role of monetary policy for the dynamics of US mortgage debt, which accounts for the largest part of household debt. A time-varying parameter vector autoregressive (VAR) model allows us to study the variation in the sensitivity of mortgage debt to monetary policy. We find that an identically sized policy shock became less effective over time. We use a dynamic stochastic general equilibrium model to show that a fall in the share of adjustable rate mortgages (ARMs) can replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a decline in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed toward reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself.

The Impacts of Technology Shocks on Sustainable Development from the Perspective of Energy Structure—A DSGE Model Approach

Considering that the effect of different types of energy on sustainable development differs, the optimization of energy structure is commonly seen as a decisive factor for sustainable development. In this study, we focus on energy structure and construct a dynamic stochastic general equilibrium (DSGE) analysis framework including the environment, society, and the economy. Furthermore, we analyze the effect of different technology shocks on sustainable development when the proportion of clean energy is separately set at 10%, 20%, and 40%. To demonstrate the conclusions of the DSGE analysis framework, we construct the sustainability index and measure the relationship between the sustainability index scores and the proportion of clean energy of 68 countries in 2017, and the of the linear relationship between the sustainability index score and the proportion of clean energy was 0.30. Results show that the technology shock of clean energy exhibits more benefits for sustainable development than that of non-clean energy. Moreover, we find that the optimization of the energy structure can be helpful for the enhancement of sustainable development capacity. This study is helpful to expand the DSGE analysis framework from the perspective of energy structure. This study also provides effective ways and reference suggestions for local governments to optimize energy structure and improve sustainable development capability.

Modelling Monetary Policy

This last chapter deals with the toolbox that central banks use to design and implement their monetary policy strategy. Central banks develop various types of model, both for forecasting and for policy analysis. The chapter discusses the main characteristics of the models used, their strengths and limitations. It assesses how dynamic stochastic general equilibrium (DSGE) models are used for monetary policy analysis. Examples are provided on how they contribute to explore fundamental, long-term policy issues specific to LFDCs. The chapter also discusses the contribution of small semi-structural models which, though less strongly theory grounded than DSGE models, can be brought closer to the available data and are therefore possibly better suited to the context of LFDCs. Attention is also drawn to the key role of judgement as the indispensable complement, in monetary policy decision-making, to model-based policy analysis.

Strategic deviations in optimal monetary policy

This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.

New Environmental Protection Taxes in China from the Perspective of Environmental Economics

In recent decades, most countries have implemented environmental protection by formulating relevant environmental regulations to reduce environmental pollution and improve environmental quality. China enacted new Environmental Protection Tax Law in 2018 and abolished the old system of pollution discharge fees. This paper analyzes and predicts the effectiveness of these new environmental tax policies within the framework of a macroeconometric dynamic stochastic general equilibrium (DSGE) model. Bayesian estimation is applied to estimate dynamic parameters based on China’s macroeconomic data from 1978 to 2018. We find that the implementation of China’s new environmental tax will lead to a significant increase in environmental quality through a reduction in the amount of pollution. However, the study reveals that new environmental taxes may have certain negative influences on economic growth. Consumption, output, wages, and capital could fall by 1.26%, 0.34%, 1.16%, and 1.12%, respectively, which may slow the pace of China’s development.

Financial Reforms and Consumption Smoothing

We study how financial reforms affect the extent of consumption smoothing in a dynamic stochastic general equilibrium model of an emerging economy. Consistent with the empirical literature and reform efforts in South Korea and South Africa, we emphasize the relation between consumer credit and durable purchases, and model reforms as the relaxation of the collateral constraint on lower income households. We find that the relaxation of the collateral constraint accounts for a substantial share of the decline in consumption smoothing experienced in South Korea and South Africa.

THE INTERNATIONAL IMPACT OF MACROPRUDENTIAL POLICIES

The recent financial crisis started a global debate on the role of financial policies, which led to financial system reforms in many countries. These reforms mainly consisted of increasing the usage of macroprudential policies. This dissertation seeks to understand whether macroprudential policies in financially integrated countries reduced their vulnerability to the impact of external shocks. Chapter 2 empirically examines the impact of macroprudential policies on cross-border bilateral credit growth. Capital requirements and loan-to-value (LTV) ratios, in 15 lending countries and 34 borrowing countries between 2000 and 2014, are used in the analysis. The results show that in some countries, the increase of capital requirements is not effective in reducing international credit flows during periods of financial vulnerability. The impact of tightening LTV ratios is more heterogeneous across countries because LTV ratios are mainly used in the housing sector and not all countries change their LTV ratio frequently. Hence, cooperation across countries is necessary but also countries should make sure that the change of macroprudential policies targeting lenders and those targeting borrowers complement each other to avoid international leakages. Chapter 3 analyzes issues related to the international spillover of macroprudential policies through international banking activities using a two-country dynamic stochastic general equilibrium model with heterogeneous and time-varying macroprudential policies. The results show that a combination of capital requirements and LTV ratios is effective in reducing credit growth despite the existence of cross-border banking activities and heterogeneous implementation of capital requirements across countries. In addition, international coordination of capital requirements is also effective in reducing credit growth but less effective than a combination of capital requirements and LTV ratios. Chapter 4 focuses on the role of countercyclical LTV ratios in reducing transmission of shocks when international investors, holding domestic and foreign assets, face collateral constraint. Using a two-country dynamic stochastic general equilibrium model, the analysis demonstrates that time-varying LTV ratios can reduce the transmission of shocks.