Friday, April 17, 2009

DSGE model for Armenia

The use of Dynamic Stochastic General Equilibrium (DSGE) models has grown among central banks in the evaluation of policy. Unlike the larger time series macro models, DSGE models are better grounded in theory.

A recent IMF working paper co-authored by an economist from the Central Bank (CBA) presents such a model for Armenia. The paper lays out the economic foundations, parameter assumptions, calibration and estimation procedures using data over 2002-2007, and a review of the accuracy of predictions.

The short history exploited in the model is a source of concern. It would have been good to use the model to predict 2008 or much earlier periods to test for prediction precision. Nevertheless, the paper is very nicely written and makes very useful addition to our understanding of the performance of the Armenian economy.

I have seen some of CBA's working papers written in Armenian. But it is good that this recent paper is made available in English which will allow for greater exposure and scrutiny.

For a review of DSGE, also known as new-Keynesian, models see here.
For an alternative view of the usefulness of such models, see American Economic Journal: Macroeconomics 2009, 1:1, 242–266. Added April 19.

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