## 6. Nominal Devaluation

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---

### Context and reform trajectory
- Morocco is moving gradually toward an inflation-targeting (IT) framework from a position of strength (no domestic financial crisis or external pressure).
- Key policy steps and background:
  - Gradual opening of the economy since early 2000s: massive infrastructure build-up; export-oriented incentives; measured liberalization of current and capital account flows; fiscal, pension, and capital market reforms; education and social reforms.
  - Authorities signaled intention to move toward a more flexible exchange rate regime and inflation targeting in the mid-2000s.
  - January 2018: government announced widening of the fluctuation band for the dirham against the US dollar and euro from ±0.3 percent to ±2.5 percent (modeling baseline continues to use fixed-rate FPAS).
- Bank Al-Maghrib (BAM) developed a Forecasting and Policy Analysis System (FPAS) with two parallel forecasting-model versions: fixed exchange rate/capital control version for the current environment and flexible exchange rate version for a future regime switch.

### Morocco’s monetary framework under a peg and capital controls
- Policy design and operational features:
  - Morocco pegs the dirham to a basket of euro and U.S. dollar and uses capital controls to retain monetary independence.
  - The exchange rate serves as the nominal anchor, pinning down aggregate price level and wage growth.
  - From 2006, the operational target has been the interbank weighted average rate, managed via the policy rate and reserve requirements.
  - BAM policy rate moved 11 times during 2000-2016; by comparison, ECB made 43 adjustments and Czech National Bank made 36 adjustments over the same period.
  - BAM relied more on non-interest instruments (reserve requirements) and occasional policy rate changes.
  - Monetary loosening after the Global Financial Crisis was effected through lower reserve requirements: the ratio was quickly cut from 16.5 percent to 6.0 percent.
- Trade-offs and outcomes:
  - Impossible trinity trade-offs: to retain short-run interest rate control, authorities choose between floating exchange rate + alternative anchor (e.g., inflation target) or continue peg + restrict capital flows.
  - Pros: insulation from global financial cycle; avoided financial bubbles and unsustainable foreign-currency private debt.
  - Cons: limited ability to meet competitiveness challenges and absorb external shocks; weaker links between monetary instruments and domestic macro objectives.
  - Internal devaluation after the Global Financial Crisis: required depreciation of about 10 percent realized through price and wage adjustments and subpar real GDP growth.

### Structural features incorporated into FPAS / MQPM
- Key economy characteristics reflected in MQPM:
  - Small open economy highly sensitive to external developments (notably euro area).
  - Large, volatile agricultural sector requiring decomposition of GDP into agricultural and nonagricultural sectors.
  - Rapid growth of automobile and other export-oriented sectors relative to domestic demand.
  - Consumption drivers: agricultural production cycles and remittances.
  - Sizable weight of volatile food items in CPI: food share at 42 percent of CPI basket.
  - Low headline inflation: averaging 1.7 percent during 1996-2015.
  - Strong exchange rate pass-through to core inflation given euro-dirham link.
  - Interbank rate shares a principal component with lending rates; policy rate changes translate relatively quickly into lending rates.
- Other preserved statistics:
  - Chinn-Ito financial openness index: Morocco ranks 141st out of 182 countries.
  - Net inflows of portfolio investments: remained insignificant at less than 0.1% of GDP during 2007-2015.
  - Foreign direct investment in per capita terms increased eight times relative to the pre-1980s period, but remained low relative to peers.
  - Bank penetration rose from 43 percent of total population in 2008 to 63 percent in 2015.
  - Construction and public works accounted for around 50 percent of gross fixed capital formation during 2000-2014.
  - Agricultural sector employed almost 40 percent of population in 2015.

### MQPM: regime-specific modeling and differences
- Purpose and implementation:
  - The Moroccan Quarterly Projection Model (MQPM) supports BAM decision-making during the transition from a fixed exchange rate with capital controls to a flexible exchange rate and eventual inflation-forecast targeting.
  - Two coded versions permit switching by altering structure and parametrization of nominal exchange rate and interest rate equations.
- Core regime differences (as implemented):
  - Fixed exchange rate regime:
    - Nominal exchange rate is an exogenous policy choice and, absent ad hoc decision, does not change.
    - Domestic interest rate: policy reaction exhibits high persistence and relatively weak inflation aversion; effective interest rate is a weighted average of BAM policy rate and UIP-implied rate.
    - Risk premium is linked inversely to international reserve coverage ratio.
  - Flexible exchange rate regime:
    - Nominal exchange rate determined by investors’ portfolio choice via risk-adjusted uncovered interest parity (UIP).
    - Domestic interest rate modeled as an inflation-forecast-based reaction function stabilizing inflation around target and minimizing capacity utilization shortfalls.
- Dynamics and persistence:
  - MQPM calibrated to reflect high persistence of Moroccan macro variables.
  - Model economy returns to steady state in about 16 quarters (about four-to-six quarters more slowly than in more open economies).

### Impulse response findings (selected shocks)
- Aggregate demand shock (positive household consumption shock):
  - Stimulates aggregate demand and inflationary pressures.
  - With fixed nominal exchange rate, higher inflation appreciates the dirham in real terms and reduces net exports.
  - Monetary authority increases domestic interest rate somewhat, but real interest rate remains negative initially for a couple of quarters.
  - Adjustment primarily via long-lasting real exchange rate appreciation that gradually offsets excess demand and returns inflation to its implicit target.
- Prices shock (positive exogenous increase in core inflation / mark-up shock):
  - Domestic prices rise swiftly.
  - Sluggish monetary response initially boosts aggregate demand as the real interest rate turns negative.
  - Adjustment primarily via exchange rate channel: domestic inflation appreciates the dirham in real terms, triggering expenditure switching toward foreign goods and reducing net exports, which holds back aggregate demand and reverses excess capacity.
  - Imported goods prices (in dirham terms) remain constant, exerting downward pressure on domestically produced goods.
- Exchange rate shock (positive nominal devaluation / dirham devaluation):
  - Devaluation raises import prices in domestic currency; these feed into headline inflation.
  - Devaluation improves net exports and creates excess demand and price pressures.
  - Long-term exchange rate pass-through equals one; domestic price level permanently adjusts to the devaluation shock only after about 16 quarters.

### Policy implications, uses of the QPM, and operational lessons
- Uses and benefits:
  - FPAS and MQPM have helped BAM modernize analytical framework and processes for forward-looking policy discussion.
  - Provide an assessment of monetary policy stance and compare alternative scenarios and risks.
  - Offer a common language between staff and management owing to flexibility and ability to capture Morocco-specific features.
  - From 2016, the MQPM has been the core model in macroeconomic projection exercise and policy analysis at BAM.
- Transitional challenges and calibration needs:
  - Refining the policy reaction function to reflect policymaker behavior under a more flexible exchange rate and inflation-forecast-targeting regime (current fixed-regime behavior offers limited guidance).
  - Uncertainty about the speed and pattern of further capital account liberalization and its impact on exchange rate dynamics and monetary policy.
  - Structural changes: rapid expansion of export-oriented sectors and other transformations will alter growth, employment, and the MQPM steady-state behavior.
  - Need to gradually reflect changes in the transmission mechanism in MQPM calibration and structure.

### FPAS technical assistance, rollout, and validation (annex summaries)
- FPAS technical assistance and rollout:
  - In 2014 the Government of Canada provided a multi-year grant to fund technical assistance in macroeconomic modeling and forecasting to support the gradual switch to inflation targeting.
  - IMF Research Department and IMF’s Monetary and Capital Markets Department worked with BAM; technical experts included former staff of the Czech National Bank and Magyar Nemzeti Bank.
  - Phase reflecting existing pegged regime lasted from 2014 to 2016; starting with the March 2016 forecast round, the framework provided policy analysis and forecasts for BAM Board monetary policy decisions.
  - Two-pronged modeling approach: parallel pegged-regime and flexible-regime FPAS frameworks; interim practice used baseline pegged-regime model and alternative managed-floating scenarios.
  - The length of the process of putting an FPAS in place is stated as unlikely to last less than 24 months.
- Empirical validation of the MQPM:
  - Historical simulations are out-of-sample, 8-quarter-ahead projections for the 2007-2015 period using ex-post realizations of exogenous and external variables.
  - Out-of-sample simulations confirm the usefulness of MQPM as a medium-term forecasting tool; projected paths of key macro variables are broadly in line with ex-post data.
  - Interbank rate specifics:
    - On average, the spread between the policy and interbank rates averaged some 25 basis points during the period under consideration.
    - Simulations indicate MQPM would have suggested nominal interest rate cuts of 25-50 basis points during 2008-12 in response to negative external shocks, whereas BAM left the interbank rate broadly unchanged until 2014.
  - Inflation and demand:
    - Historical simulations fit core and headline inflation very well.
    - Tight monetary conditions and negative fiscal impulses opened a negative domestic demand gap and brought inflation down to zero during 2009.
    - Inflation accelerated during 2010-11 mostly owing to a short-lived increase in non-volatile food prices.
    - MQPM captured turning points in domestic demand but struggled with high volatility driven by agricultural weather conditions, remittances swings, and out-of-model shocks.

_Provided content unit: wp1827 — "6. Nominal Devaluation" (IMF staff)._

### References .............................................................................................................

### References

### Tables
- 1. Modeling Solutions to Regime Differences .........................................................................11
- 2. The MQPM Structure Under the Fixed Exchange Rate Regime .........................................13

### Figures
- 1. Morocco: Macroeconomic Developments .............................................................................7
- 2. Inflation and Monetary Transmission ....................................................................................9
- 3. A Positive One-Percent shock to Euro Area Inflation .........................................................12
- 4. An Increase in Household Consumption .............................................................................14
- 5. An Increase in Domestic Inflation .......................................................................................15

*Source: wp1827 - References (wp1827.pdf).*

### 6. Nominal Devaluation .................................................................................................

### 6. Nominal Devaluation

### Context and reform trajectory
- Morocco is moving gradually toward an inflation-targeting (IT) framework from a position of strength (no domestic financial crisis or external pressure).
- Key policy steps and background:
  - Gradual opening of the economy since early 2000s: massive infrastructure build-up; export-oriented incentives; measured liberalization of current and capital account flows; fiscal, pension, and capital market reforms; education and social reforms.
  - Authorities signaled intention to move toward a more flexible exchange rate regime and inflation targeting in the mid-2000s.
  - January 2018: government announced widening of the fluctuation band for the dirham against the US dollar and euro from ±0.3 percent to ±2.5 percent (modeling baseline continues to use fixed-rate FPAS).
- Bank Al-Maghrib (BAM) developed a Forecasting and Policy Analysis System (FPAS) with two parallel forecasting-model versions: fixed exchange rate/capital control version for the current environment and flexible exchange rate version for a future regime switch.

### Morocco’s monetary framework under a peg and capital controls
- Policy design:
  - Morocco pegs the dirham to a basket of euro and U.S. dollar and uses capital controls to retain monetary independence.
  - The exchange rate serves as the nominal anchor, pinning down aggregate price level and wage growth.
- Impossible trinity trade-offs: to retain short-run interest rate control, authorities choose between floating exchange rate + alternative anchor (e.g., inflation target) or continue peg + restrict capital flows.
- Pros and cons of the current mix:
  - Pros: insulation from global financial cycle; avoided financial bubbles and unsustainable foreign-currency private debt.
  - Cons: limited ability to meet competitiveness challenges and absorb external shocks; weaker links between monetary instruments and domestic macro objectives.
- Operational features and evidence:
  - From 2006, the operational target has been the interbank weighted average rate, managed via the policy rate and reserve requirements.
  - BAM policy rate moved 11 times during 2000-2016; by comparison, ECB made 43 adjustments and Czech National Bank made 36 adjustments over the same period.
  - BAM relied more on non-interest instruments (reserve requirements) and occasional policy rate changes.
  - Internal devaluation after the Global Financial Crisis: required depreciation of about 10 percent realized through price and wage adjustments and subpar real GDP growth.

### Structural features incorporated into FPAS / MQPM
- Key economy characteristics reflected in MQPM:
  - Small open economy highly sensitive to external developments (notably euro area).
  - Large, volatile agricultural sector requiring decomposition of GDP into agricultural and nonagricultural sectors.
  - Rapid growth of automobile and other export-oriented sectors relative to domestic demand.
  - Consumption drivers: agricultural production cycles and remittances.
  - Sizable weight of volatile food items in CPI: food share at 42 percent of CPI basket.
  - Low headline inflation: averaging 1.7 percent during 1996-2015.
  - Strong exchange rate pass-through to core inflation given euro-dirham link.
  - Interbank rate shares a principal component with lending rates; policy rate changes translate relatively quickly into lending rates.
- Other statistics preserved in the source:
  - Chinn-Ito financial openness index: Morocco ranks 141st out of 182 countries.
  - Net inflows of portfolio investments: remained insignificant at less than 0.1% of GDP during 2007-2015.
  - Foreign direct investment in per capita terms increased eight times relative to the pre-1980s period, but remained low relative to peers.
  - Bank penetration rose from 43 percent of total population in 2008 to 63 percent in 2015.
  - Construction and public works accounted for around 50 percent of gross fixed capital formation during 2000-2014.
  - Agricultural sector employed almost 40 percent of population in 2015.

### MQPM: regime-specific modeling and differences
- Purpose:
  - The Moroccan Quarterly Projection Model (MQPM) supports BAM decision-making during the transition from a fixed exchange rate with capital controls to a flexible exchange rate and eventual inflation-forecast targeting.
  - Two coded versions permit switching by altering structure and parametrization of nominal exchange rate and interest rate equations.
- Core regime differences (as implemented):
  - Fixed exchange rate regime:
    - Nominal exchange rate is an exogenous policy choice and, absent ad hoc decision, does not change.
    - Domestic interest rate: policy reaction exhibits high persistence and relatively weak inflation aversion; effective interest rate is a weighted average of BAM policy rate and UIP-implied rate.
    - Risk premium is linked inversely to international reserve coverage ratio.
  - Flexible exchange rate regime:
    - Nominal exchange rate determined by investors’ portfolio choice via risk-adjusted uncovered interest parity (UIP).
    - Domestic interest rate modeled as an inflation-forecast-based reaction function stabilizing inflation around target and minimizing capacity utilization shortfalls.
- Dynamics and persistence:
  - MQPM calibrated to reflect high persistence of Moroccan macro variables.
  - Model economy returns to steady state in about 16 quarters (about four-to-six quarters more slowly than in more open economies).

### Impulse response findings (selected shocks)
- Aggregate demand shock (positive household consumption shock):
  - Stimulates aggregate demand and inflationary pressures.
  - With fixed nominal exchange rate, higher inflation appreciates the dirham in real terms and reduces net exports.
  - Monetary authority increases domestic interest rate somewhat, but real interest rate remains negative initially for a couple of quarters.
  - Adjustment primarily via long-lasting real exchange rate appreciation that gradually offsets excess demand and returns inflation to its implicit target.
- Prices shock (positive exogenous increase in core inflation / mark-up shock):
  - Domestic prices rise swiftly.
  - Sluggish monetary response initially boosts aggregate demand as the real interest rate turns negative.
  - Adjustment primarily via exchange rate channel: domestic inflation appreciates the dirham in real terms, triggering expenditure switching toward foreign goods and reducing net exports, which holds back aggregate demand and reverses excess capacity.
  - Imported goods prices (in dirham terms) remain constant, exerting downward pressure on domestically produced goods.
- Exchange rate shock (positive nominal devaluation / dirham devaluation):
  - Devaluation raises import prices in domestic currency; these feed into headline inflation.
  - Devaluation improves net exports and creates excess demand and price pressures.
  - Long-term exchange rate pass-through equals one; domestic price level permanently adjusts to the devaluation shock only after about 16 quarters.

### Policy implications and uses of the QPM
- FPAS and MQPM have helped BAM:
  - Modernize analytical framework and processes for forward-looking policy discussion.
  - Provide an assessment of monetary policy stance and compare alternative scenarios and risks.
  - Offer a common language between staff and management owing to flexibility and ability to capture Morocco-specific features.
- Key transitional challenges for MQPM use:
  - Refining the policy reaction function to reflect policymaker behavior under a more flexible exchange rate and inflation-forecast-targeting regime (current fixed-regime behavior offers limited guidance).
  - Uncertainty about the speed and pattern of further capital account liberalization and its impact on exchange rate dynamics and monetary policy.
  - Structural changes: rapid expansion of export-oriented sectors and other transformations will alter growth, employment, and the MQPM steady-state behavior.
  - Need to gradually reflect changes in the transmission mechanism in MQPM calibration and structure.
- Operational note:
  - From 2016, the MQPM has been the core model in macroeconomic projection exercise and policy analysis at BAM.

*Source: IMF staff; chapter "6. Nominal Devaluation" from the provided PDF content.*

### REFERENCES

### REFERENCES

### Key literature cited
- Works on monetary policy frameworks, inflation targeting, and model-based analysis:
  - Alichi et al., 2015a, “Avoiding Dark Corners: A Robust Monetary Policy,” IMF Working Paper 15/134.
  - Alichi et al., 2015b, “Frontiers of Monetary Policymaking: Adding the Exchange Rate as a Tool to Combat Deflationary Risks in the Czech Republic,” IMF Working Paper 15/74.
  - Alichi et al., 2009, “Inflation Targeting Under Imperfect Policy Credibility,” IMF Working Paper 09/94.
  - Berg, Karam, and Laxton, 2006a, “Practical Model-Based Monetary Policy Analysis — Overview,” IMF Working Paper 06/80; 2006b, “Practical Model-Based Monetary Policy Analysis — A How-To Guide,” IMF Working Paper 06/81.
  - Benes, Kumhof, and Laxton, 2014, “Financial Crises in DSGE Models: A Prototype Model,” IMF Working Paper 14/57.
  - Clark, Laxton, and Rose, 1995 and 2001 on capacity constraints and policy rules.
  - Clinton et al., 2015a and 2015b on “Inflation-Forecast Targeting: Applying the Principle of Transparency,” IMF Working Paper 15/132 and supplemental annex.
  - Obstfeld et al., 2016, “How to Improve Inflation Targeting in Canada,” IMF Working Paper 16/192.
  - Rey, 2010 and 2013 on the trilemma/dilemma and global financial cycle.

- Studies on exchange rates, capital flows, and the policy trilemma:
  - Edwards and Levy Yeyati, 2005, “Flexible Exchange Rates as Shock Absorbers.”
  - Klein and Shambaugh, 2013, “Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy,” NBER Working Paper No. 19461.
  - Kaminsky, Reinhart, and Vegh, 2004, “When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies,” NBER Working Paper No. 10780.
  - Obstfeld, Shambaugh, and Taylor, 2005, “The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility.”
  - Reinhart and Reinhart, 2008, “Capital Flow Bonanzas: An Encompassing View of the Past and Present,” NBER Working Paper No. 14321.

- Morocco-specific and regional studies:
  - Bank Al-Maghrib, 2016, Strategic Plan 2016-2018.
  - Benazzi, 2017, “Analyse de la concurrence bancaire au Maroc : Approche de Panzar et Rosse”, BAM Working Paper.
  - Bouzahzah and Bachar, 2014, “Exchange Rate Policy in Morocco and Persistence of Real Exchange Rate Misalignments”.
  - Taamouti, 2015, “Background Paper on Monetary Policy – The Kingdom of Morocco,” AMF-BIS Working Paper.
  - Zottel et al., 2014, “Enhancing Financial Capability and Inclusion in Morocco: A Demand-side Assessment.” (World Bank Group)
  - IMF country work: IMF, 2016a, Morocco: 2015 Article IV Consultation-Staff Report; IMF, 2016b, Morocco: Financial System Stability Assessment.

### FPAS Technical Assistance in Morocco (Annex I) — implementation and lessons
- Timeline and context:
  - Moroccan authorities began considering an alternative to the exchange rate peg during the early 2000s.
  - A mid-2000s conference co-organized by Bank Al-Maghrib (BAM) and the IMF on inflation targeting provided initial impetus.
  - The commitment to a flexible exchange rate and inflation targeting was repeatedly restated despite a temporary stall during the Great Recession.
  - The regime choice in Morocco was described as purely internal, not under external pressure.

- Technical assistance program:
  - In 2014 the Government of Canada provided a multi-year grant to fund technical assistance in macroeconomic modeling and forecasting to support the gradual switch to inflation targeting.
  - IMF Research Department worked with BAM; technical experts included former staff of the Czech National Bank and Magyar Nemzeti Bank.
  - Assistance encompassed modeling, central bank communication, and operational process modifications.
  - Additional technical assistance was provided by IMF’s Monetary and Capital Markets Department.
  - The BAM 2016-2018 Strategic Plan incorporated the recommendations (Bank Al-Maghrib, 2016).

- FPAS (Forecasting and Policy Analysis System) rollout and organizational changes:
  - The process was designed to be gradual; key FPAS elements were to be in place before a regime switch.
  - Phase reflecting existing pegged regime lasted from 2014 to 2016; external experts facilitated learning by BAM staff.
  - Starting with the March 2016 forecast round, the framework provided policy analysis and forecasts for BAM Board monetary policy decisions.
  - Organizational adjustments at BAM included role changes, creation of new divisions, and reassignment of responsibilities to support FPAS.

- Two-pronged modeling approach:
  - BAM staff and TA experts developed a parallel analytical and forecasting model embodying the features of a more flexible dirham regime.
  - The flexible-exchange-rate FPAS framework could be switched on immediately after a policy decision.
  - Interim practice: quarterly baseline scenarios using the pegged-regime model and alternative scenarios using the managed-floating-regime model.
  - The two-pronged approach allowed staff and managers to gain familiarity with FPAS under the familiar peg-based regime.

- Policy lesson and timelines:
  - The Morocco FPAS TA project is presented as a useful model for other emerging market or low-income countries considering a gradual switch to inflation targeting.
  - Such countries can establish an FPAS using the current regime, gradually building skills and preparing policymakers for a regime change.
  - The length of the process of putting an FPAS in place depends on internal factors (technical preparedness, willingness of managers to experiment, policymakers’ support) and is stated as unlikely to last less than 24 months.

### Empirical validation of the MQPM (Annex II)
- Methodology of validation:
  - Historical simulations of the MQPM present out-of-sample, 8-quarter-ahead evolution of key model variables for the 2007-2015 period using spider charts.
  - No expert judgment imposed; ex-post realizations of exogenous and external variables were used.
  - Use of ex-post data improves forecast performance relative to real-time data but makes the model responsible for remaining forecast errors.

- Overall assessment:
  - Out-of-sample simulations confirm the usefulness of MQPM as a medium-term forecasting tool for policy decisions.
  - Projected paths of key macro variables are broadly in line with ex-post data; remaining deviations attributable to differences between model-based and actual monetary policy decisions and out-of-model developments.

- Interbank rate:
  - MQPM uses the interbank rate in lieu of a “policy rate” as it better captures BAM’s effective policymaking intentions.
  - On average, the spread between the policy and interbank rates averaged some 25 basis points during the period under consideration.
  - The spread is comparable to other emerging market countries (Bulíř and Vlček, 2015).
  - Simulations indicate lower-than-actual interbank rates after the Global Financial Crisis:
    - MQPM would have suggested nominal interest rate cuts of 25-50 basis points during 2008-12 in response to negative external shocks.
    - In reality, BAM reaction was more conservative; the interbank rate remained broadly unchanged until 2014.
    - Monetary loosening was effected through lower reserve requirements: the ratio was quickly cut from 16.5 percent to 6.0 percent.
    - The policy rate was decreased by 50 basis points in 2014 and the interbank rate declined in tandem.

- Inflation:
  - Historical simulations fit core and headline inflation very well.
  - Tight monetary conditions and a series of negative fiscal impulses opened up a negative domestic demand gap and brought inflation down to zero during 2009.
  - Inflation accelerated during 2010-11 mostly owing to a short-lived increase in non-volatile food prices (mostly cereals and cooking oil).
  - Core inflation forecast errors were mostly related to outside-of-model developments (example: competition in the telecom sector driving down mobile service price).
  - Headline inflation forecast errors were mostly related to non-core components, such as volatile food items (example: the 2014 decline in headline CPI traced to a drop in prices of fresh vegetables and citrus fruits).

- Domestic demand:
  - Historical simulations capture turning points in domestic demand, but observed series is too volatile for a medium-term model fit.
  - Volatility primarily driven by weather conditions affecting agricultural developments, which affect private consumption and investment.
  - MQPM struggled with post-2009 shocks: decline in remittances; negative domestic fiscal impulse starting in 2014; swings in oil and other commodity prices.

- Simulation specifics and data notes:
  - Historical simulations are out-of-sample, 8-quarter-ahead projections for the 2007-2015 period.
  - No expert judgment is imposed and ex-post realizations of exogenous and external variables are used in lieu of near-term forecasts.

### Abbreviations and variable definitions (Annex III)
- Key variables and definitions used in Table 2:
  - i_i_b_t: The interbank rate, representing the policy rate
  - r_n_t: The natural rate of interest
  - i_uip_t: UIP-implied interest rate
  - i_rr_t: The country risk premium
  - r_cm_i_t: Monetary conditions index
  - π_t: Headline inflation
  - π_t_core: Core inflation
  - π_t_admin: Administered price changes
  - π_t_iv: Volatile fresh food price changes
  - π_t+3_devi: The t+3 period ahead deviation of the inflation rate from the implicit target
  - r_md/rir: The dirham to euro nominal exchange rate
  - S_t: Nominal exchange rate
  - zhat_t: The real exchange rate gap
  - rmc_t: Real marginal cost
  - y_t: Real GDP
  - ystar_t: The output gap
  - yagri_t_gap: The agricultural production gap
  - ystar*_t: The foreign output gap
  - chat_t: The real private consumption gap
  - r_i_inv_t: The real investment gap
  - ghat_t: The real government consumption gap
  - xhat_t: The real exports gap
  - rri_t: The real imports gap
  - remcyc_t: The cyclical components of remittances from abroad
  - q_t: Tobin’s q
  - porpor_t: International oil price
  - ddd_t: The domestic demand gap

*Source: wp1827 - REFERENCES (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1827.pdf_