Macroeconomic Model Spillovers and Their Discontents

Author/Editor: Tamim Bayoumi ; Francis Vitek
Publication Date: January 08, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: The Great Recession underlined that policies in some countries can have profound spillovers elsewhere. Sadly, the solution of simulating large macroeconomic models to measure these spillovers has been found wanting. Typical models generate lower international correlations of output and financial asset prices than are seen in even pre-crisis data. Imposing higher financial market correlations creates more reasonable cross-country spillovers, and is likely to become the norm in policy modeling despite weak theoretical underpinnings, as is already true of sticky wages. We propose using event studies to calibrate market reactions to particular policy announcements, and report results for U.S. monetary and fiscal policy announcements in 2009 and 2010 that are plausible and event-specific.
Series: Working Paper No. 13/4
Subject(s): Spillovers | Cross country analysis | Economic models

Publication Date: January 08, 2013
ISBN/ISSN: 9781475519860/1018-5941 Format: Paper
Stock No: WPIEA2013004 Pages: 25
US$18.00 (Academic Rate:
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