## _wp14200

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---

### Model structure and scope
- Structural panel dynamic stochastic general equilibrium (DSGE) model of the world economy disaggregated into forty national economies.
- Key features:
  - Short run nominal price and wage rigidities via monopolistic competition, staggered reoptimization, and partial indexation (Smets and Wouters (2003); Monacelli (2005)).
  - Inertia and persistence from habit persistence in consumption, investment adjustment costs, variable capital utilization (Christiano, Eichenbaum and Evans (2005)).
  - Differentiated households by credit constraints; credit unconstrained households allocate wealth across internationally diversified short term bond, long term bond, and stock portfolios (Vitek (2013)).
  - Commodity industries produce internationally homogeneous goods under decreasing returns to scale; other industries produce internationally heterogeneous goods under constant returns to scale (Vitek (2013)).
  - Involuntary unemployment via reinterpretation of the labor market (Galí (2011)).
- Estimation approach: approximate linear state space representation estimated with a Bayesian procedure, conditional on informative priors concerning common structural parameter values across economies.
- Applications: monetary and fiscal transmission quantification, business cycle accounting, spillover analysis, and forecasting of inflation and output growth.

### Data, sample, and measurement
- Sample period: 1999Q1 through 2013Q4.
- Economies included (forty): Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States.
- Observed variables (cyclical components extracted and used for estimation; total of 621 endogenous variables across forty economies) include:
  - Price of output (GDP price deflator), price of consumption (CPI), quantity of output (real GDP), private consumption, exports, imports, nominal policy interest rate, short and long term nominal market interest rates, price of equity, nominal wage, unemployment rate, employment, nominal bilateral exchange rate, public domestic demand, fiscal balance ratio, prices of nonrenewable energy and nonenergy commodities.
- Cyclical component extraction:
  - For prices, quantities, equity price, nominal wage, employment, exchange rates, public demand, and commodity prices: d = 2 and λ = 16,000.
  - For nominal policy rate, short and long term market rates, unemployment rate, fiscal balance ratio: d = 1 and λ = 400.
- Calibration and additional data:
  - Great ratios and bilateral trade and portfolio weights calibrated to observed values in 2011; calibration data from IMF, BIS, World Bank, DOTS, CPIS.

### Empirical framework and estimation procedure
- Linearization around a deterministic steady state with zero inflation and zero net financial asset holdings unless stated otherwise.
- Linear rational expectations state space with Kalman filter/smoother for unobserved state estimation.
- Bayesian estimation: posterior p(θ | {ŷt}) ∝ p(ŷ | θ) p(θ); posterior mode found by maximizing log posterior kernel with modified steepest ascent; starting values from differential evolution algorithm.
- Innovation variances estimated conditional on diffuse priors; many structural parameters estimated conditional on informative priors, some calibrated.
- Monetary regimes assigned per economy: flexible inflation targeting, managed exchange rate, or fixed exchange rate as listed in the source.
- International financial integration classification provided for emerging economies; quotation currency: United States.
- Estimation diagnostics:
  - Posterior mode computed for sample 1999Q3–2013Q4.
  - Klein (2000) sufficient condition for unique stationary RE equilibrium satisfied in a neighborhood around the posterior mode.
  - Hessian estimator not nearly singular at posterior mode → evidence of local identification.
  - Posterior modes of most structural parameters close to prior means due to tight priors, but data informative for some parameters resulting in substantial posterior updates.

### Representative impulse response findings — domestic shocks
- Productivity shock:
  - Persistent hump-shaped increase in inflation.
  - Persistent hump-shaped contraction of output.
  - Central bank generally raises nominal policy interest rate.
  - Currency appreciates in real effective terms.
  - Fiscal balance deteriorates due to lower output and higher debt service.
  - Current account tends to improve reflecting higher terms of trade.
- Labor supply shock:
  - Persistent hump-shaped expansion of output.
  - Persistent hump-shaped decrease in inflation.
  - Central bank typically cuts nominal policy interest rate.
  - Currency depreciates in real effective terms.
  - Fiscal balance typically improves due to higher output and lower debt service.
  - Current account tends to deteriorate reflecting lower terms of trade.
- Consumption demand shock:
  - Persistent hump-shaped expansion of output and consumption.
  - Persistent hump-shaped increase in inflation.
  - Central bank usually raises nominal policy interest rate, crowding out investment and appreciating the currency.
  - Fiscal balance improves due to higher output despite higher debt service.
  - Current account deteriorates due to larger domestic demand increase.
- Investment demand shock:
  - Persistent hump-shaped expansion of output and investment.
  - Persistent hump-shaped increase in inflation.
  - Central bank typically raises nominal policy interest rate, crowding out consumption and appreciating the currency.
  - Fiscal balance improves.
  - Current account deteriorates.
- Monetary policy shock (domestic):
  - Persistent increase in nominal policy interest rate (except under fixed exchange rate regimes).
  - Currency appreciates in real effective terms.
  - Persistent hump-shaped contraction of output and persistent decrease in inflation.
  - Quantitative statement preserved from source (text truncated in original): in response to a one percentage point increase in the nominal policy interest rate, the median peak contraction of output is 0.2 percent across economies within a range of 0.1 to 0.3 percent.
  - Unemployment: the median peak increase in the unemployment rate is 0.1 percentage points within a range of 0.0 to 0.1 percentage points (under a fixed exchange rate regime, transient increase in the nominal policy rate induces transient appreciation, fiscal balance deterioration, and current account improvement).
- Credit risk premium shock (short-term nominal market interest rate):
  - Persistent increase in short term nominal market interest rate → currency appreciates in real effective terms (except perhaps under a currency union).
  - Output: persistent hump-shaped contraction.
    - In response to a one percentage point increase in the short term nominal market interest rate, the median peak contraction of output is 0.3 percent across economies, within a range of 0.0 to 0.4 percent.
  - Inflation: persistent decrease.
  - Monetary policy: central bank generally cuts the nominal policy interest rate.
  - Fiscal balance: deteriorates.
  - Current account: usually improves.
- Duration risk premium shock (long-term nominal market interest rate):
  - Output: persistent hump-shaped contraction.
    - In response to a one percentage point increase in the long term nominal market interest rate, the median peak contraction of output is 0.3 percent across economies, within a range of 0.0 to 0.6 percent.
  - Inflation: persistent hump-shaped decrease.
  - Monetary policy: central bank typically cuts the nominal policy interest rate.
  - Exchange rate: the currency depreciates in real effective terms.
  - Fiscal balance: deteriorates.
  - Current account: improves.
- Equity risk premium shock (price of equity):
  - Persistent increase in price of equity → output expansion.
    - In response to a ten percent increase in the price of equity, the median peak expansion of output is 0.1 percent across economies, within a range of 0.0 to 0.3 percent.
  - Inflation: persistent hump-shaped increase.
  - Monetary policy: central bank usually raises the nominal policy interest rate.
  - Exchange rate: currency appreciates in real effective terms.
  - Fiscal balance: improves due to rise in output.
  - Current account: deteriorates.
- Fiscal shocks:
  - Fiscal expenditure shock improving fiscal balance:
    - Output: persistent contraction accompanied by persistent hump-shaped decrease in inflation.
      - In response to a one percentage point increase in the ratio of the primary fiscal balance to nominal output, the median peak contraction of output is 1.0 percent within a range of 0.1 to 1.6 percent.
    - Contraction generally decreases across economies with their trade openness.
    - Monetary policy: central bank usually cuts the nominal policy interest rate.
    - Investment: crowding in of investment.
    - Exchange rate: depreciates in real effective terms.
    - Current account: improves.
  - Fiscal revenue shock improving fiscal balance:
    - Output: persistent contraction accompanied by decrease in inflation.
    - (Quantitative median peak contraction text truncated in source.)

### Effects of world commodity price markup shocks
- World energy or nonenergy commodity price markup shock that increases commodity prices:
  - Inflation increases; central bank raises nominal policy interest rate.
  - For net exporters of the commodity:
    - Currency generally appreciates in real effective terms.
    - Consumption expands driven by improved terms of trade, mitigated by monetary policy tightening.
    - Output expands.
    - Fiscal and current account balances usually improve.
  - For net importers of the commodity:
    - Currency typically depreciates in real effective terms.
    - Consumption contracts driven by worse terms of trade and monetary tightening.
    - Output contracts.
    - Fiscal and current account balances tend to deteriorate.

### Forecast error variance decompositions (FEVD) — key attributions
- Inflation:
  - Primarily driven by supply and terms of trade shocks; demand and monetary policy also contribute.
  - Domestic relative to foreign demand shock contributions generally decrease with trade openness and increase with monetary policy autonomy.
- Output:
  - Mostly attributed to demand shocks, followed by supply and monetary policy shocks.
  - Domestic relative to foreign demand contributions generally decrease with trade openness.
- Consumption and investment:
  - Domestic demand shocks are larger contributors at all horizons.
  - Fiscal policy shocks significant for unpredictable consumption fluctuations at short horizons.
  - Risk premium and terms of trade shocks significant for investment fluctuations at all horizons.
- Nominal policy interest rate:
  - Primarily driven by supply and monetary policy shocks.
  - Demand and terms of trade shocks prominent at long horizons.
  - Domestic relative to foreign demand contributions increase with monetary policy autonomy.
- Real effective exchange rate:
  - Most unpredictable variation attributed to supply and demand shocks; monetary policy and risk premium shocks also contribute.
  - Domestic relative to foreign risk premium contributions increase with monetary policy autonomy.
- Unemployment:
  - Mostly driven by supply and demand shocks; monetary policy and terms of trade contribute.
- Fiscal balance:
  - Primarily driven by fiscal policy shocks; demand and monetary policy also contribute.
  - Monetary policy shock contributions increase with net government debt positions.
  - Terms of trade shocks significant for major commodity exporters.
- Current account:
  - Most unpredictable variation attributed to demand shocks, plus monetary policy and risk premium shocks for economies with high net foreign asset or debt positions.
  - Terms of trade shocks significant for major commodity exporters and importers.

### Historical decompositions and episodes
- Inflation deviations from trend:
  - Attributed to economy specific combinations of supply and demand shocks, and terms of trade shocks.
  - Trend inflation stabilized at relatively low levels in advanced economies with flexible inflation targeting (Australia, Canada, the Czech Republic, Israel, Korea, New Zealand, Norway, Sweden, United Kingdom).
- Output growth business cycle dynamics:
  - Driven primarily by demand shocks and, to a lesser extent, supply and risk premium shocks.
  - Major deficit economies (United Kingdom, United States): business cycle fluctuations primarily driven by domestic demand shocks.
  - Major surplus economies (China, Germany): fluctuations primarily driven by foreign demand shocks.
  - Fluctuations amplified by risk premium shocks and mitigated by fiscal policy shocks.
- Global financial cycle episodes:
  - Build up to the global financial crisis: positive demand shocks + risk premium amplification → synchronized global expansion and inflation rise, amplified by terms of trade shocks.
  - Global financial crisis: negative demand shocks amplified by risk premium shocks → synchronized global recession; mitigated by unsystematic countercyclical monetary or fiscal policy interventions; synchronized fall in inflation and rise in unemployment, inflation fall amplified by terms of trade shocks.
  - Post-crisis recovery: positive demand shocks, generally amplified by risk premium shocks, supported synchronized recovery; Euro Area periphery recovery derailed by risk premium shocks requiring procyclical fiscal interventions.

### Spillover analysis — simulated conditional betas and contagion
- Systemic economies considered: China, the Euro Area, Japan, the United Kingdom, the United States.
- Shocks considered: macroeconomic (productivity, labor supply, consumption demand, investment demand, monetary policy, fiscal expenditure, fiscal revenue) and financial (credit risk premium, duration risk premium, equity risk premium).
- Simulated conditional betas:
  - On average over the business cycle, output spillovers from systemic economies to the rest of the world primarily generated by macroeconomic shocks; macro shocks contribute more to business cycle fluctuations than financial shocks.
  - International business cycle comovement is weak beyond close trading partners under typical conditions; during financial stress in systemic economies, comovement strengthens due to financial shocks and contagion.
  - Macro shock spillovers are small, concentrated, and follow gravity patterns; supply shocks dilute gravity via terms of trade channels.
  - Financial shock spillovers are large and diffuse, transcending bilateral portfolio links via international comovement in financial asset prices.
  - Contagion effects strongest from the United States; strong to internationally financially integrated emerging economies; moderate to advanced economies; weak to internationally financially unintegrated emerging economies.
- Representative foreign shock impulse responses (peak):
  - Foreign productivity shock increasing foreign inflation and contracting foreign output:
    - Recipient currencies generally depreciate in real effective terms.
    - Terms of trade driven increases in recipient inflation and output; fiscal and current account balances tend to improve.
  - Foreign labor supply shock expanding foreign output and decreasing foreign inflation:
    - Recipient currencies generally appreciate in real effective terms.
    - Terms of trade driven decreases in recipient inflation and contractions in recipient output; fiscal and current account balances tend to deteriorate.
  - Foreign consumption or investment demand shocks:
    - Recipient inflation and output expand, often amplified by recipient currency depreciations; fiscal and current account balances usually improve.
  - Foreign monetary policy tightening:
    - Recipient currencies generally depreciate; recipient inflation and output tend to decrease; fiscal and current account balances tend to deteriorate.
  - Foreign credit/duration risk premium shocks:
    - International money and bond market contagion raises recipient short and long term rates; recipient inflation decreases and output contracts; fiscal and current account balances deteriorate.
  - Foreign equity price increase:
    - International stock market contagion raises recipient equity prices; recipient inflation and output increase; fiscal and current account balances improve.
  - Foreign fiscal tightening (improvement in fiscal balance):
    - Typically foreign demand driven decreases in recipient inflation and contractions in recipient output; recipient fiscal and current account balances usually deteriorate.

### Forecasting performance
- Sequential unconditional forecasts of consumption price inflation and output growth evaluated relative to a random walk using the logarithm of the U statistic (Theil (1966)).
- Key results over the holdout sample:
  - Root mean squared prediction error is 39 percent lower for inflation and 33 percent lower for output growth, on average across economies and horizons.
  - Marginal predictive power typically increases with forecast horizon.
  - Sequential forecasts indicate ability to predict business cycle turning points and suggested a synchronized global moderation ahead of the global financial crisis, though the model:
    - Underpredicted the severity of the synchronized global recession.
    - Overpredicted the disinflationary impact of the recession.
    - Underpredicted the weakness of the subsequent synchronized global recovery in most advanced economies.

### Structural parameter estimation highlights (selected exact values)
- Selected prior means, prior standard deviations, and posterior modes (prior mean; prior standard deviation; posterior mode):
  - : 0.9000; 0.0900; 0.9216
  - H: 0.2000; 0.0200; 0.1962
  - F: 1.7500; 0.1750; 1.7347
  - : 0.0500; 0.0050; 0.0523
  - Y: 0.5000; 0.0500; 0.4506
  - M: 0.5000; 0.0500; 0.4882
  - L: 0.5000; 0.0500; 0.5160
  - : 0.0800; 0.0080; 0.0779
  - : 0.5000; 0.0500; 0.4976
  - M: 0.2500; 0.0250; 0.2544
  - Y: 0.8750; 0.0875; 0.8645
  - M: 0.8750; 0.0875; 0.8337
  - L: 0.8750; 0.0875; 0.9066
  - 1Y: 0.3333; 0.0333; 0.3437
  - 2Y: 0.3333; 0.0333; 0.3385
  - C: 0.4500; 0.0450; 0.4653
  - 1F: 0.9000; 0.0900; 0.9168
  - 2F: 0.8000; 0.0800; 0.8117
  - M: 1.5000; 0.1500; 1.5604
  - i: 0.7500; 0.0750; 0.7233
  - G: 0.7500; 0.0750; 0.7411
  - : 0.7500; 0.0750; 0.7587
  - : 5.0000; 0.5000; 5.2537
  - 0: 1.5000; 0.1500; 1.5047
  - 1: 1.5000; 0.1500; 1.4849
  - 0M: 1.0984; 0.1098; 1.1140
  - 1M: 1.6475; 0.1648; 1.5770
  - 2M: 0.5492; 0.0549; 0.5309
  - 0B: 1.0984; 0.1098; 1.0967
  - 1B: 1.6475; 0.1648; 1.6422
  - 2B: 0.5492; 0.0549; 0.5591
  - 0S: 1.3901; 0.1390; 1.3796
  - 1S: 2.0851; 0.2085; 2.1074
  - 2S: 0.6950; 0.0695; 0.7326
  - : 0.7500; 0.0750; 0.7901
  - C: 0.7500; 0.0750; 0.7868
  - I: 0.7500; 0.0750; 0.7554
  - X: 0.7500; 0.0750; 0.7523
  - M: 0.7500; 0.0750; 0.7561
  - ,iS: 0.7500; 0.0750; 0.7372
  - B: 0.7500; 0.0750; 0.8237
  - S: 0.7500; 0.0750; 0.7783
  - : 0.7500; 0.0750; 0.7745
  - L: 0.7500; 0.0750; 0.7436

### Limitations and directions for future research
- Current model represents financial intermediation via globally integrated capital markets but does not include parallel commercial bank intermediation subject to financial frictions and regulatory constraints.
- Future research objective: add commercial bank intermediation with financial frictions and regulatory constraints to better capture macrofinancial dynamics and crisis amplification mechanisms.

*Content drawn exclusively from the supplied IMF PDF chapter/section _wp14200 - References.*

### Appendix A. Description of the Data Set ................................................................................

### Appendix A. Description of the Data Set

### Contents overview (Appendix A and Appendix B)
- Appendix A. Description of the Data Set — page 51
- Appendix B. Tables and Figures — page 53

### Tabular item
- Table 1. Structural Parameter Estimation Results — page 53

### Figures — Impulse responses to domestic shocks
- Figure 1. Impulse Responses to a Domestic Productivity Shock — page 55
- Figure 2. Impulse Responses to a Domestic Labor Supply Shock — page 56
- Figure 3. Impulse Responses to a Domestic Consumption Demand Shock — page 57
- Figure 4. Impulse Responses to a Domestic Investment Demand Shock — page 58
- Figure 5. Impulse Responses to a Domestic Monetary Policy Shock — page 59
- Figure 6. Impulse Responses to a Domestic Credit Risk Premium Shock — page 60
- Figure 7. Impulse Responses to a Domestic Duration Risk Premium Shock — page 61
- Figure 8. Impulse Responses to a Domestic Equity Risk Premium Shock — page 62
- Figure 9. Impulse Responses to a Domestic Fiscal Expenditure Shock — page 63
- Figure 10. Impulse Responses to a Domestic Fiscal Revenue Shock — page 64

### Figures — Impulse responses to world commodity price shocks
- Figure 11. Impulse Responses to a World Energy Commodity Price Markup Shock — page 65
- Figure 12. Impulse Responses to a World Nonenergy Commodity Price Markup Shock — page 66

### Figures — Forecast error variance decompositions
- Figure 13. Forecast Error Variance Decompositions of Consumption Price Inflation — page 67
- Figure 14. Forecast Error Variance Decompositions of Output — page 68
- Figure 15. Forecast Error Variance Decompositions of Private Consumption — page 69
- Figure 16. Forecast Error Variance Decompositions of Private Investment — page 70
- Figure 17. Forecast Error Variance Decompositions of the Nominal Policy Interest Rate — page 71
- Figure 18. Forecast Error Variance Decompositions of the Real Effective Exchange Rate — page 72
- Figure 19. Forecast Error Variance Decompositions of the Unemployment Rate — page 73
- Figure 20. Forecast Error Variance Decompositions of the Fiscal Balance Ratio — page 74
- Figure 21. Forecast Error Variance Decompositions of the Current Account Balance Ratio — page 75

### Figures — Historical decompositions and simulated betas
- Figure 22. Historical Decompositions of Consumption Price Inflation — page 76
- Figure 23. Historical Decompositions of Output Growth — page 77
- Figure 24. Historical Decompositions of the Unemployment Rate — page 78
- Figure 25. Simulated Conditional Betas of Output — page 79

### Figures — Peak impulse responses to foreign shocks
- Figure 26. Peak Impulse Responses to Foreign Productivity Shocks — page 80
- Figure 27. Peak Impulse Responses to Foreign Labor Supply Shocks — page 81
- Figure 28. Peak Impulse Responses to Foreign Consumption Demand Shocks — page 82
- Figure 29. Peak Impulse Responses to Foreign Investment Demand Shocks — page 83
- Figure 30. Peak Impulse Responses to Foreign Monetary Policy Shocks — page 84
- Figure 31. Peak Impulse Responses to Foreign Credit Risk Premium Shocks — page 85
- Figure 32. Peak Impulse Responses to Foreign Duration Risk Premium Shocks — page 86
- Figure 33. Peak Impulse Responses to Foreign Equity Risk Premium Shocks — page 87
- Figure 34. Peak Impulse Responses to Foreign Fiscal Expenditure Shocks — page 88
- Figure 35. Peak Impulse Responses to Foreign Fiscal Revenue Shocks — page 89

### Figures — Forecast evaluation and sequential forecasts
- Figure 36. Forecast Performance Evaluation Statistics — page 90
- Figure 37. Sequential Unconditional Forecasts of Consumption Price Inflation — page 91
- Figure 38. Sequential Unconditional Forecasts of Output Growth — page 92

*Appendix A. Description of the Data Set and Appendix B. Tables and Figures — listing as provided in the source content.*

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

### _wp14200 - References

### I. Introduction — scope and model overview
- Develops a structural macroeconometric panel dynamic stochastic general equilibrium (DSGE) model of the world economy disaggregated into forty national economies.
- Model features:
  - Short run nominal price and wage rigidities via monopolistic competition, staggered reoptimization, and partial indexation (following Smets and Wouters (2003) and Monacelli (2005)).
  - Inertia and persistence from habit persistence in consumption, investment adjustment costs, and variable capital utilization (following Christiano, Eichenbaum and Evans (2005)).
  - Differentiated households by credit constraints; credit unconstrained households allocate wealth across internationally diversified short term bond, long term bond, and stock portfolios (following Vitek (2013)).
  - Commodity industries produce internationally homogeneous goods under decreasing returns to scale; other industries produce internationally heterogeneous goods under constant returns to scale (following Vitek (2013)).
  - Incorporates involuntary unemployment via a reinterpretation of the labor market (following Galí (2011)).
- Estimation approach: approximate linear state space representation estimated with a Bayesian procedure, conditional on prior information concerning common values of structural parameters across economies.
- Applications demonstrated: monetary and fiscal transmission quantification, business cycle accounting, and forecasting of inflation and output growth.
- Forecasting result highlighted: sequential unconditional forecasts of inflation and output growth dominate a random walk in predictive accuracy by wide margins, on average across economies and horizons.

### II. Theoretical framework — key structural components and equilibrium conditions
- Agents and markets:
  - Finite set of structurally isomorphic national economies indexed by i ∈ {1, …, N}.
  - Households: continuum indexed h ∈ [0,1]; differentiated by credit constraint status (credit unconstrained measure Uφ, credit constrained measure Cφ, with 0<Uφ≤1, 0<Cφ≤1, and Uφ + Cφ = 1).
  - Firms: continuum of monopolistically competitive intermediate producers, industry structure with M industries, first M* produce nonrenewable commodities; labor perfectly mobile across industries.
  - Governments: monetary and fiscal authorities per economy.
  - Integrated global output, money, bond, and stock markets; economy i issues quotation currency for foreign exchange transactions.
- Household preferences and portfolio structure:
  - Intertemporal utility with discount factor β, external habit in consumption, intratemporal utility separable over consumption, labor supply, and real financial wealth (equations (1)–(4)); parameters include α, σ, η, ν, ι, ψ, and various φ weights.
  - Financial assets: internationally traded and local currency denominated short term bonds, long term bonds, and stocks; preferences over portfolios represented by CES subutility functions (equations (4)–(9)).
  - Capitalist spirit motive and portfolio diversification motive parameters (Aiν, Aψ) with limiting interpretations: Aiν → 0 removes capitalist motive; Aψ → ∞ removes diversification motive.
- Credit unconstrained households:
  - Optimality conditions: intertemporal Euler (11) equating expected present value of gross real portfolio return to one; intratemporal labor–consumption condition (12); portfolio return aggregation conditions (13)–(16) linking expected returns across domestic and foreign short term bonds, long term bonds, and stocks.
- Credit constrained households:
  - Static budget constraint (17); intratemporal labor–consumption condition (18).
- Labor market and nominal wage rigidity:
  - Final labor service produced from differentiated intermediate labor services via CES (19) with wage markup shock θL > 1.
  - Wage-setting: fraction 1−ωL reoptimize optimally; fraction ωL index to past consumption price inflation with parameter γL (22); optimal wage first order condition (23); aggregate wage index (24).
  - Incorporates involuntary unemployment via Galí (2011) reinterpretation.
- Production, investment, and price rigidity:
  - Final output good produced from industry final goods via fixed proportions (25)–(27); industry final goods from differentiated intermediate goods via CES (28)–(30) with price markup shocks θY > 1.
  - Intermediate firms maximize pre-dividend stock market value (31); dividends equal after-tax earnings less investment expenditures (32).
  - Capital usage and investment: production uses capital and labor (33); capital utilization cost (35) with Kμ, κ; capital accumulation with depreciation δ (36); effective investment with convex adjustment costs (37).
  - Nominal price rigidity: Calvo-style for output prices with fraction 1−ωY reoptimizing and partial indexation parameter γY for the rest (42)–(44).
- Trade sector:
  - Definitions of nominal and real effective exchange rates and terms of trade (45)–(47).
  - Export and import production and aggregation structures for final export goods (48)–(50) and final import goods (55)–(57).
  - Import price rigidity: Monacelli-style for intermediate import goods with fraction 1−ωM reoptimizing and partial indexation (63)–(65).
- Monetary and fiscal policy:
  - Monetary policy: nominal policy interest rate follows partial-adjustment rule (66) with parameters ρ, ξπ, ξY, ξX depending on regime j (flexible inflation targeting j=0, managed exchange rate j=1, fixed exchange rate j=2); policy shocks Pν are mean zero and serially uncorrelated.
  - Fiscal policy: public consumption rule with partial adjustment (67) (parameter ρG, ζG, shock Gν); tax rate rule with partial adjustment (68) (ρτ, ζη); money market relationship links yield to maturity on short term bonds to nominal policy rate and national financial wealth ratio (69) with spread shock S i ν.
  - Government budget constraint aggregates public wealth, bond holdings, taxes, and purchases (70).
- Market clearing:
  - Final output and import market clearing (71)–(73).
  - Net foreign asset position equals household + firm + government financial wealth (74).
  - Government fiscal balance and current account relations connecting public and private saving and interest flows (75)–(76).

### III. Empirical framework — linearized multivariate rational expectations representation
- Linearization:
  - Equilibrium conditions linearized around stationary deterministic steady state with zero inflation and zero net financial asset holdings unless stated otherwise.
  - Notation: x̂it denotes deviation of variable xit from steady state; Eti denotes rational expectation conditional on information at t.
  - Bilateral and world weights Zijw and Ziw defined based on exports (ZX), imports (ZM), debt (ZB), equity (ZS), and output (ZY) as applicable.
- Endogenous linear relationships (examples and exact equations preserved):
  - Output price Phillips curve (77) — output price inflation π̂Yit depends on past and expected future values, contemporaneous labor income share, output, internal terms of trade; polynomial lag operator LYY specified.
  - Consumption price Phillips curve (78) — consumption price inflation π̂Cit similarly depends on internal/external terms of trade.
  - Output demand (79) — ln Ŷit depends on past and expected future values and contemporaneous real ex ante portfolio return, profit and disposable labor income, investment, public demand, export-weighted foreign demand, and terms of trade; coefficients vary with domestic demand composition, government size, labor income share, trade openness, and trade pattern.
  - Domestic demand (80), Consumption (81), Investment demand (82), Investment Euler (83), Capital utilization (84), Capital stock dynamics.
  - Export demand (85), Import demand (86).
  - Nominal ex ante portfolio return (87) — ÊH A t+1,i depends on short term nominal market interest rate and duration/equity/currency risk premia; auxiliary parameter Hχ predicted to equal one.
  - Monetary policy rule in reduced form (88); money market (89); bond market (90); stock market (91).
  - Profit function (92); wage Phillips curve (93); labor supply (94); employment production relation (95).
  - Foreign exchange market (96) and relations for internal terms of trade (97), external terms of trade dynamics (98), public demand (99), output tax rule (100), fiscal balance and government budget dynamics (101)–(103), current account (104)–(106), commodity price Phillips curve (107).
- Exogenous shock processes:
  - Productivity, labor supply, consumption demand, investment demand, export and import demand shocks follow AR(1) stationary processes (108)–(113).
  - Credit, duration, equity, currency risk premium shocks follow AR(1) (114)–(117).
  - Price markup shocks and monetary/fiscal shocks follow white noise processes (118)–(124).
  - All innovations assumed independent for identification; combined assumptions imply multivariate normality.

### IV. Estimation — data, filtering, and Bayesian procedure
- Data:
  - Estimation uses cyclical components of 621 endogenous variables for forty economies over sample period 1999Q1 through 2013Q4.
  - Economies: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States.
  - Observed variables: price of output, price of consumption, quantity of output, private consumption, exports, imports, nominal policy interest rate, short and long term nominal market interest rates, price of equity, nominal wage, unemployment rate, employment, nominal bilateral exchange rate, public domestic demand, fiscal balance ratio, prices of nonrenewable energy and nonenergy commodities.
- Cyclical component extraction:
  - Generalization of Hodrick–Prescott filter parameterizing difference order d and quantifying uncertainty.
  - For prices, quantities, equity price, nominal wage, employment, exchange rates, public demand, and commodity prices: set d = 2 and λ = 16,000.
  - For nominal policy rate, short and long term market rates, unemployment rate, fiscal balance ratio: set d = 1 and λ = 400.
- State space and estimation:
  - Linear state space representation (133)–(134) with Kalman filter/smoother for unobserved state estimation (135)–(144).
  - Bayesian estimation: posterior p(θ | {ŷt}) ∝ p(ŷ | θ) p(θ) with multivariate normal prior on θ (145)–(147).
  - Posterior mode found by maximizing log posterior kernel with modified steepest ascent; starting values from differential evolution algorithm.
  - Hessian estimator based on first derivatives (149) used for asymptotic inference.
- Parameterization and calibration:
  - Structural parameters either estimated conditional on informative independent priors or calibrated; innovation variances estimated conditional on diffuse priors.
  - Monetary regimes assigned per economy: flexible inflation targeting in Australia, Canada, Chile, the Czech Republic, the Euro Area, Israel, Japan, Mexico, New Zealand, Norway, Poland, Sweden, the United Kingdom and the United States; managed exchange rate in Argentina, Brazil, China, Colombia, India, Indonesia, Korea, Malaysia, the Philippines, Russia, South Africa, Switzerland, Thailand and Turkey; fixed exchange rate in Denmark and Saudi Arabia (consistent with IMF (2012)).
  - International financial integration classification: internationally financially integrated emerging economies are Argentina, Brazil, Colombia, India, Indonesia, Mexico, the Philippines, Poland, Russia, South Africa, Thailand and Turkey; internationally financially unintegrated emerging economies are Chile, China, Malaysia and Saudi Arabia.
  - Quotation currency: United States.
  - Great ratios and bilateral trade and portfolio weights calibrated to observed values in 2011; weights normalized to sum to one.
- Estimation results summary:
  - Posterior mode computed for sample 1999Q3–2013Q4; Klein (2000) sufficient condition for unique stationary rational expectations equilibrium satisfied in a neighborhood around the posterior mode.
  - Hessian estimator not nearly singular at posterior mode → local identification.
  - Posterior modes of most structural parameters close to prior means due to tight priors aimed to preserve empirically plausible impulse responses, but data informative for some parameters resulting in substantial posterior updates and updated impulse responses.

### V. Monetary and fiscal policy analysis — impulse responses and diagnostics
- Approach:
  - Quantify dynamics among instrument, indicator and target variables via estimated impulse response functions, forecast error variance decompositions, and historical decompositions.
  - Structural shocks examined include domestic productivity, labor supply, consumption demand, investment demand, monetary policy, credit/duration/equity risk premia, fiscal expenditure, fiscal revenue, and world commodity price markup shocks.
- Representative impulse response findings (exact quoted magnitudes preserved where provided):
  - Productivity shock: persistent hump-shaped increase in inflation; persistent hump-shaped contraction of output; central bank generally raises nominal policy interest rate; currency appreciates in real effective terms; fiscal balance deteriorates due to lower output and higher debt service; current account tends to improve reflecting higher terms of trade.
  - Labor supply shock: persistent hump-shaped expansion of output; persistent hump-shaped decrease in inflation; central bank typically cuts nominal policy interest rate; currency depreciates in real effective terms; fiscal balance typically improves due to higher output and lower debt service; current account tends to deteriorate reflecting lower terms of trade.
  - Consumption demand shock: persistent hump-shaped expansion of output and consumption; persistent hump-shaped increase in inflation; central bank usually raises nominal policy interest rate, crowding out investment and appreciating the currency in real effective terms; fiscal balance improves due to higher output despite higher debt service; current account deteriorates due to larger domestic demand increase.
  - Investment demand shock: persistent hump-shaped expansion of output and investment; persistent hump-shaped increase in inflation; central bank typically raises nominal policy interest rate, crowding out consumption and appreciating the currency; fiscal balance improves; current account deteriorates.
  - Monetary policy shock (domestic):
    - Generates persistent increase in nominal policy interest rate (except under fixed exchange rate regimes).
    - Currency appreciates in real effective terms.
    - Persistent hump-shaped contraction of output and a persistent decrease in inflation.
    - Quantitative statement: "in response to a one percentage point increase in the nominal policy interest rate, the median peak contraction of output is 0.2 percent across economies within a range of 0.1 to 0.3 percent, while the median peak decrease in inflation is" — (text cuts off thereafter in supplied content).

*Italic source attribution: Content drawn exclusively from the supplied IMF PDF chapter/section _wp14200 - References.*

### 0.1 percentage points within a range of 0.1 to 0.2 percentage points, and the median peak

### _wp14200 - 0.1 percentage points within a range of 0.1 to 0.2 percentage points, and the median peak

### Responses to domestic monetary policy shocks
- A transient increase in the nominal policy interest rate under a fixed exchange rate regime:
  - Induces a transient appreciation of the currency in real effective terms.
  - Fiscal balance: deteriorates due to the fall in output and rise in debt service costs.
  - Current account balance: generally improves commensurate with the larger fall in domestic demand.
- Unemployment:
  - The median peak increase in the unemployment rate is 0.1 percentage points within a range of 0.0 to 0.1 percentage points.

### Responses to domestic credit risk premium shocks (short-term nominal market interest rate)
- A persistent increase in the short term nominal market interest rate:
  - The currency appreciates in real effective terms except perhaps under a currency union.
  - Output: persistent hump shaped contraction.
    - In response to a one percentage point increase in the short term nominal market interest rate, the median peak contraction of output is 0.3 percent across economies, within a range of 0.0 to 0.4 percent.
  - Inflation: persistent decrease.
  - Monetary policy: central bank generally cuts the nominal policy interest rate to stabilize inflation and output.
  - Fiscal balance: deteriorates due to the fall in output and rise in debt service costs.
  - Current account balance: usually improves reflecting the larger fall in domestic demand.

### Responses to domestic duration risk premium shocks (long-term nominal market interest rate)
- A persistent increase in the long term nominal market interest rate:
  - Output: persistent hump shaped contraction.
    - In response to a one percentage point increase in the long term nominal market interest rate, the median peak contraction of output is 0.3 percent across economies, within a range of 0.0 to 0.6 percent.
  - Inflation: generally accompanied by a persistent hump shaped decrease.
  - Monetary policy: central bank typically cuts the nominal policy interest rate to stabilize inflation and output.
  - Exchange rate: the currency depreciates in real effective terms.
  - Fiscal balance: deteriorates due to the fall in output and rise in debt service costs.
  - Current account balance: improves commensurate with the larger fall in domestic demand.

### Responses to domestic equity risk premium shocks (price of equity)
- A persistent increase in the price of equity:
  - Output: persistent hump shaped expansion.
    - In response to a ten percent increase in the price of equity, the median peak expansion of output is 0.1 percent across economies, within a range of 0.0 to 0.3 percent.
  - Inflation: generally accompanied by a persistent hump shaped increase.
  - Monetary policy: central bank usually raises the nominal policy interest rate to stabilize inflation and output.
  - Exchange rate: the currency appreciates in real effective terms.
  - Fiscal balance: improves due to the rise in output in spite of higher debt service costs.
  - Current account balance: deteriorates reflecting the larger rise in domestic demand.

### Responses to domestic fiscal shocks
- Fiscal expenditure shock that generates a persistent improvement in the fiscal balance:
  - Output: persistent contraction accompanied by a persistent hump shaped decrease in inflation.
    - In response to a one percentage point increase in the ratio of the primary fiscal balance to nominal output, the median peak contraction of output is 1.0 percent within a range of 0.1 to 1.6 percent.
    - The contraction generally decreases across economies with their trade openness.
  - Monetary policy: central bank usually cuts the nominal policy interest rate to stabilize inflation and output.
  - Investment: crowding in of investment.
  - Exchange rate: depreciates in real effective terms.
  - Current account balance: improves, reflecting the larger fall in domestic demand than in output.
- Fiscal revenue shock that generates a persistent improvement in the fiscal balance:
  - Output: persistent contraction accompanied by a decrease in inflation.
  - In response to a one percentage point increase in the ratio of the primary fiscal balance to nominal output, the median peak contraction of output is (text truncated in source at this point).

*Source: IMF working paper content from the supplied PDF excerpt.*

### 0.4 percent within a range of 0.0 to 0.6 percent, and generally decreases across economies with

### _wp14200 - 0.4 percent within a range of 0.0 to 0.6 percent, and generally decreases across economies with

### Effects of commodity price markup shocks
- World energy or nonenergy commodity price markup shock that increases commodity prices:
  - Inflation increases and the central bank raises the nominal policy interest rate.
  - For net exporters of energy or nonenergy commodities:
    - Currency generally appreciates in real effective terms.
    - Terms of trade driven expansion of consumption, mitigated by monetary policy tightening.
    - Output expands despite terms of trade driven expenditure switching.
    - Fiscal and current account balances usually improve, reflecting the rise in the terms of trade.
  - For net importers of energy or nonenergy commodities:
    - Currency typically depreciates in real effective terms.
    - Terms of trade driven contraction of consumption, amplified by monetary policy tightening.
    - Output contracts despite terms of trade driven expenditure switching.
    - Fiscal and current account balances tend to deteriorate, reflecting the fall in the terms of trade.

### Forecast Error Variance Decompositions (FEVD)
- Variables analyzed: consumption price inflation, output, private consumption, private investment, nominal policy interest rate, real effective exchange rate, unemployment rate, fiscal balance ratio, current account balance ratio.
- Structural shock sets: domestic supply, foreign supply, domestic demand, foreign demand, world monetary policy, domestic fiscal policy, foreign fiscal policy, domestic risk premium, foreign risk premium, world terms of trade shocks.
- Key findings:
  - Inflation:
    - Primarily driven by supply and terms of trade shocks, and to a lesser extent demand and monetary policy shocks, at all horizons.
    - Contribution of domestic relative to foreign demand shocks generally decreases across economies with their trade openness and increases with their monetary policy autonomy.
  - Output:
    - Mostly attributed to demand shocks, followed by supply and monetary policy shocks, at all frequencies.
    - Contribution of domestic relative to foreign demand shocks usually decreases across economies with their trade openness.
  - Consumption and investment:
    - Similar patterns to output, but domestic demand shocks are larger contributors at all horizons; foreign demand shocks are smaller contributors.
    - Fiscal policy shocks are significant contributors to unpredictable consumption fluctuations at short horizons.
    - Risk premium and terms of trade shocks tend to be significant contributors to unpredictable investment fluctuations at all horizons.
  - Nominal policy interest rate:
    - Primarily driven by supply and monetary policy shocks at all horizons.
    - Demand and terms of trade shocks are major contributors at long horizons.
    - Contribution of domestic relative to foreign demand shocks generally increases across economies with their monetary policy autonomy.
  - Real effective exchange rate:
    - Most unpredictable variation attributed to supply and demand shocks, and to a lesser extent monetary policy and risk premium shocks, at all frequencies.
    - Contribution of domestic relative to foreign risk premium shocks usually increases across economies with their monetary policy autonomy.
  - Unemployment rate:
    - Mostly driven by supply and demand shocks, and to a lesser extent monetary policy and terms of trade shocks, at all horizons.
    - Contribution of domestic relative to foreign demand shocks typically decreases across economies with their trade openness.
  - Fiscal balance:
    - Primarily driven by fiscal policy shocks, and to a lesser extent demand and monetary policy shocks, at all horizons.
    - Contribution of monetary policy shocks generally increases across economies with their net government debt positions.
    - Terms of trade shocks significant for major net commodity exporters.
  - Current account balance:
    - Most unpredictable variation attributed to demand shocks at all frequencies, together with monetary policy and risk premium shocks for economies with high net foreign asset or debt positions.
    - Terms of trade shocks typically significant for major net commodity exporters and importers.

### Historical Decompositions
- Variables analyzed: consumption price inflation, output growth, unemployment rate.
- Structural shock sets identical to FEVD.
- Key findings:
  - Inflation deviations from trend:
    - Primarily attributed to economy specific combinations of supply and demand shocks, together with terms of trade shocks.
    - Contribution of domestic relative to foreign demand shocks generally decreased across economies with their trade openness and increased with their monetary policy autonomy.
    - Trend inflation rates have typically stabilized at relatively low levels in advanced economies, particularly those with well established flexible inflation targeting regimes such as Australia, Canada, the Czech Republic, Israel, Korea, New Zealand, Norway, Sweden, and the United Kingdom.
  - Output growth business cycle dynamics:
    - Primarily driven by economy specific combinations of demand shocks, and to a lesser extent supply and risk premium shocks.
    - Major deficit economies (United Kingdom, United States): business cycle fluctuations primarily driven by domestic demand shocks.
    - Major surplus economies (China, Germany): business cycle fluctuations primarily driven by foreign demand shocks.
    - In both groups, fluctuations generally amplified by risk premium shocks and mitigated by fiscal policy shocks.
    - Trend output growth rates typically stabilized at relatively low levels in advanced economies and at relatively high levels in emerging economies.
  - Unemployment deviations from trend:
    - Primarily attributed to economy specific combinations of supply and demand shocks.
    - Contribution of domestic relative to foreign demand shocks generally decreased across economies with their trade openness.
- Episodes:
  - Build up to the global financial crisis:
    - Positive demand shocks contributed to a synchronized global expansion, amplified by risk premium shocks and reflected in a synchronized global rise in inflation, generally amplified by world terms of trade shocks.
  - Global financial crisis:
    - Negative demand shocks, amplified and accelerated by risk premium shocks, generated a synchronized global recession.
    - Mitigated by countercyclical unsystematic monetary or fiscal policy interventions.
    - Reflected in a synchronized global fall in inflation and rise in the unemployment rate; inflation fall typically amplified by terms of trade shocks.
  - Post-crisis recovery:
    - Positive demand shocks, generally amplified by risk premium shocks, contributed to a synchronized global recovery.
    - Euro Area periphery recovery derailed by risk premium shocks, necessitating procyclical unsystematic fiscal policy interventions.

### Spillover Analysis
- Model framework: estimated panel dynamic stochastic general equilibrium model with trade, financial and commodity price linkages; macroeconomic shocks transmitted via direct financial linkages; financial shocks also transmitted via indirect financial linkages representing contagion.
- Systemic economies considered: China, the Euro Area, Japan, the United Kingdom, the United States.
- Shocks considered:
  - Macroeconomic: productivity, labor supply, consumption demand, investment demand, monetary policy, fiscal expenditure, fiscal revenue.
  - Financial: credit risk premium, duration risk premium, equity risk premium.
- Simulated conditional betas:
  - Measure contemporaneous comovement (causality) of output with respect to contemporaneous output in systemic economies.
  - On average over the business cycle:
    - Output spillovers from systemic economies to the rest of the world primarily generated by macroeconomic shocks, which contribute more to business cycle fluctuations than financial shocks.
    - Implies weak international business cycle comovement beyond close trading partners.
    - During episodes of financial stress in systemic economies, international business cycle comovement is more uniformly strong due to prevalence of financial shocks propagating via elevated contagion effects.
    - Output spillovers from macroeconomic shocks are generally small but concentrated and exhibit gravity (concentrated among geographically close trading partners).
    - Supply shocks dilute the gravity pattern because they transmit internationally primarily via terms of trade shifts.
    - Output spillovers from financial shocks are generally large and diffuse, transcending bilateral portfolio investment relationships via international comovement in financial asset prices.
    - Contagion effects are uniquely strong from the United States; strong to internationally financially integrated emerging economies; moderate to advanced economies; weak to internationally financially unintegrated emerging economies.
- Impulse response functions (peak responses):
  - Foreign productivity shock (increase in inflation and contraction of output in systemic economy):
    - Recipient economies’ currencies generally depreciate in real effective terms.
    - Terms of trade driven increases in inflation and expansions of output in recipient economies despite lower foreign demand.
    - Fiscal and current account balances tend to improve.
  - Foreign labor supply shock (decrease in inflation and expansion of output in systemic economy):
    - Recipient economies’ currencies generally appreciate in real effective terms.
    - Terms of trade driven decreases in inflation and contractions of output in recipient economies despite higher foreign demand.
    - Fiscal and current account balances tend to deteriorate.
  - Foreign consumption demand shock (increase in inflation and expansion of output in systemic economy):
    - Foreign demand driven increases in inflation and expansions of output in recipient economies, amplified by depreciations of their currencies in real effective terms.
    - Fiscal and current account balances usually improve.
  - Foreign investment demand shock (increase in inflation and expansion of output in systemic economy):
    - Foreign demand driven increases in inflation and expansions of output in recipient economies, amplified by depreciations of their currencies in real effective terms.
    - Fiscal and current account balances tend to improve.
  - Foreign monetary policy shock (increase in nominal policy interest rate in systemic economy):
    - Recipient economies’ currencies generally depreciate in real effective terms.
    - Foreign demand driven decreases in inflation and contractions of output in recipient economies, mitigated by terms of trade deteriorations.
    - Fiscal and current account balances tend to deteriorate.
  - Foreign credit risk premium shock (increase in short term nominal market interest rate in systemic economy):
    - Short term nominal market interest rates of recipient economies generally increase (international money market contagion).
    - Usually decreases in inflation and contractions of output in recipient economies, with deteriorations of fiscal and current account balances.
  - Foreign duration risk premium shock (increase in long term nominal market interest rate in systemic economy):
    - Long term nominal market interest rates of recipient economies generally increase (international bond market contagion).
    - Typically decreases in inflation and contractions of output in recipient economies, with deteriorations of fiscal and current account balances.
  - Foreign equity risk premium shock (increase in price of equity in systemic economy):
    - Prices of equity in recipient economies generally increase (international stock market contagion).
    - Usually increases in inflation and expansions of output in recipient economies, with improvements in fiscal and current account balances.
  - Foreign fiscal expenditure shock (improvement in fiscal balance in systemic economy):
    - Generally foreign demand driven decreases in inflation and contractions of output in recipient economies.
    - Fiscal and current account balances usually deteriorate in recipient economies.
  - Foreign fiscal revenue shock (improvement in fiscal balance in systemic economy):
    - Generally foreign demand driven decreases in inflation and contractions of output in recipient economies.
    - Fiscal and current account balances typically deteriorate in recipient economies.

### Forecasting performance
- Forecasting exercise: sequential unconditional forecasts in sample for consumption price inflation and output growth; holdout sample of size R; horizons h in {1, …, H}.
- Evaluation metric: logarithm of the U statistic due to Theil (1966) (ratio of root mean squared prediction errors). If ln Uih < 0 then estimated model dominates a random walk for economy i at horizon h over the holdout sample.
- Settings used: 9RS = (value stated as) 9RS and 2HS = (value stated as) 2HS, where 4S = denotes the seasonal frequency.
- Key results:
  - The estimated model generally dominates a random walk in predictive accuracy for inflation and output growth.
  - Over the holdout sample, the root mean squared prediction error is 39 percent lower for inflation and 33 percent lower for output growth, on average across economies and horizons.
  - The marginal predictive power is typically increasing with respect to the forecast horizon.
  - Sequential unconditional forecasts indicate the model can predict business cycle turning points and suggested that a synchronized global moderation was overdue by the time of the global financial crisis.
  - Model limitations:
    - Underpredicted the severity of the synchronized global recession.
    - Overpredicted the disinflationary impact of the recession.
    - Underpredicted the weakness of the subsequent synchronized global recovery in most advanced economies.

### Conclusion and research directions
- The paper develops a structural panel dynamic stochastic general equilibrium model disaggregated into forty national economies, featuring nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels.
- Demonstrated applications: monetary policy analysis, fiscal policy analysis, spillover analysis, forecasting, impulse response functions, historical decompositions, sequential unconditional forecasts of inflation and output growth.
- Model consolidates theoretical and empirical knowledge on world business cycle dynamics and provides a framework for progressive research.
- Noted limitation and future research objective:
  - Model features financial intermediation via globally integrated capital markets, but not parallel commercial banks subject to financial frictions and regulatory constraints.
  - Adding commercial bank intermediation with financial frictions and regulatory constraints remains an objective for future research.

*Source: _wp14200 - 0.4 percent within a range of 0.0 to 0.6 percent, and generally decreases across economies with (PDF).*

### Appendix A. Description of the Data Set

### Appendix A. Description of the Data Set

### Data coverage and sample period
- Estimation is based on quarterly data observed for forty economies over the sample period 1999Q1 through 2013Q4.
- Where available, data were obtained from the GDS and WEO databases compiled by the International Monetary Fund. Otherwise, data were extracted from the IFS database produced by the International Monetary Fund.

### Economies included
- Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States.

### Macroeconomic variables and measurement definitions
- Price of output
  - Measured by the seasonally adjusted gross domestic product price deflator.
- Price of consumption
  - Proxied by the seasonally adjusted consumer price index.
- Quantity of output
  - Measured by seasonally adjusted real gross domestic product.
- Quantity of private consumption
  - Measured by seasonally adjusted real private consumption expenditures.
- Quantity of exports
  - Measured by seasonally adjusted real export revenues.
- Quantity of imports
  - Measured by seasonally adjusted real import expenditures.
- Nominal wage
  - Derived from the quadratically interpolated annual labor income share.
- Unemployment rate
  - Measured by the seasonally adjusted share of total unemployment in the total labor force.
- Employment
  - Measured by quadratically interpolated annual total employment.
- Quantity of public domestic demand
  - Measured by the sum of quadratically interpolated annual real consumption and investment expenditures of the general government.
- Fiscal balance ratio
  - Measured by the quadratically interpolated annual overall fiscal balance of the general government.
- Prices of nonrenewable energy and nonenergy commodities
  - Proxied by broad commodity price indexes denominated in United States dollars.

### Financial market variables and measurement definitions
- Nominal policy interest rate
  - Measured by the central bank discount rate.
- Short term nominal market interest rate
  - Measured by a three month money market rate.
- Long term nominal market interest rate
  - Measured by the ten year government bond yield.
- Price of equity
  - Proxied by a broad stock price index denominated in domestic currency units.
- Nominal bilateral exchange rate
  - Measured by the domestic currency price of one United States dollar.
- All financial market variables are expressed as a period average.

### Calibration data and additional data sources
- Calibration is based on annual data obtained from databases compiled by the International Monetary Fund where available, and from the Bank for International Settlements or the World Bank Group otherwise.
- Macroeconomic great ratios are derived from the WEO and WDI databases.
- Financial great ratios are derived from the IFS and BIS databases.
- Bilateral trade weights are derived from the DOTS database.
- Portfolio weights are derived from the CPIS, BIS, and WDI databases.

*Appendix A. Description of the Data Set — _wp14200*

### Appendix B. Tables and Figures

### Appendix B. Tables and Figures

### Structural Parameter Estimation Results
- Note: All priors are normally distributed, while all posteriors are asymptotically normally distributed.
- Parameters (Prior Mean; Prior Standard Deviation; Posterior Mode):
  - : 0.9000; 0.0900; 0.9216
  - : 0.9756; 0.0000; ...
  - H: 0.2000; 0.0200; 0.1962
  - F: 1.7500; 0.1750; 1.7347
  - G: 0.9639; 0.0000; ...
  - : 0.0250; 0.0000; ...
  - : 0.0500; 0.0050; 0.0523
  - Y: 0.5000; 0.0500; 0.4506
  - M: 0.5000; 0.0500; 0.4882
  - L: 0.5000; 0.0500; 0.5160
  - : 0.0800; 0.0080; 0.0779
  - : 0.5000; 0.0500; 0.4976
  - M: 0.2500; 0.0250; 0.2544
  - Y: 0.8750; 0.0875; 0.8645
  - M: 0.8750; 0.0875; 0.8337
  - L: 0.8750; 0.0875; 0.9066
  - 1Y: 0.3333; 0.0333; 0.3437
  - 2Y: 0.3333; 0.0333; 0.3385
  - C: 0.4500; 0.0450; 0.4653
  - 1F: 0.9000; 0.0900; 0.9168
  - 2F: 0.8000; 0.0800; 0.8117
  - M: 1.5000; 0.1500; 1.5604
  - i: 0.7500; 0.0750; 0.7233
  - G: 0.7500; 0.0750; 0.7411
  - : 0.7500; 0.0750; 0.7587
  - : 5.0000; 0.5000; 5.2537
  - Y: 7.6667; 0.0000; ...
  - M: 7.6667; 0.0000; ...
  - L: 7.6667; 0.0000; ...
  - 0: 1.5000; 0.1500; 1.5047
  - 1: 1.5000; 0.1500; 1.4849
  - 0Y: 0.1250; 0.0125; 0.1275
  - 1Y: 0.1250; 0.0125; 0.1252
  - 1: 0.0250; 0.0025; 0.0239
  - i: −0.0000; 0.0000; ...
  - G: 0.0013; 0.0000; ...
  - : −0.0375; 0.0000; ...
  - 0M: 1.0984; 0.1098; 1.1140
  - 1M: 1.6475; 0.1648; 1.5770
  - 2M: 0.5492; 0.0549; 0.5309
  - 0B: 1.0984; 0.1098; 1.0967
  - 1B: 1.6475; 0.1648; 1.6422
  - 2B: 0.5492; 0.0549; 0.5591
  - 0S: 1.3901; 0.1390; 1.3796
  - 1S: 2.0851; 0.2085; 2.1074
  - 2S: 0.6950; 0.0695; 0.7326
  - : 0.7500; 0.0750; 0.7901
  - C: 0.7500; 0.0750; 0.7868
  - I: 0.7500; 0.0750; 0.7554
  - X: 0.7500; 0.0750; 0.7523
  - M: 0.7500; 0.0750; 0.7561
  - ,iS: 0.7500; 0.0750; 0.7372
  - B: 0.7500; 0.0750; 0.8237
  - S: 0.7500; 0.0750; 0.7783
  - : 0.7500; 0.0750; 0.7745
  - L: 0.7500; 0.0750; 0.7436

### Impulse Response Figures — Domestic Shocks (Figures 1–11)
- Common note for Figures 1–11:
  - Each figure "Depicts the impulse responses of consumption price inflation ■ (lhs), output ■ (lhs), private consumption ■ (lhs), private investment ■ (rhs), the nominal policy interest rate ■ (lhs), the real effective exchange rate ■ (lhs), the unemployment rate ■ (lhs), the fiscal balance ratio ■ (lhs), and the current account balance ratio ■ (lhs) to" a specified domestic shock. Results are annualized where applicable.
- Specific shocks illustrated:
  - Figure 1: domestic productivity shocks which raise output price inflation by one percentage point.
  - Figure 2: domestic labor supply shocks which raise the labor force by one percent.
  - Figure 3: domestic consumption demand shocks which raise private consumption by one percent.
  - Figure 4: domestic investment demand shocks which raise private investment by one percent.
  - Figure 5: domestic monetary policy shocks which raise the nominal policy interest rate by one percentage point.
  - Figure 6: domestic credit risk premium shocks which raise the short term nominal market interest rate by one percentage point.
  - Figure 7: domestic duration risk premium shocks which raise the long term nominal market interest rate by one percentage point.
  - Figure 8: domestic equity risk premium shocks which raise the price of equity by ten percent.
  - Figure 9: domestic fiscal expenditure shocks which raise the primary fiscal balance ratio by one percentage point.
  - Figure 10: domestic fiscal revenue shocks which raise the primary fiscal balance ratio by one percentage point.
  - Figure 11: world energy commodity price markup shock which raises the price of energy commodities by ten percent.

### Impulse Response Figures — World/Foreign Shocks (Figures 12–35)
- Common note for Figures 12–35:
  - Each figure "Depicts the impulse responses of consumption price inflation ■ (lhs), output ■ (lhs), private consumption ■ (lhs), private investment ■ (rhs), the nominal policy interest rate ■ (lhs), the real effective exchange rate ■ (lhs), the unemployment rate ■ (lhs), the fiscal balance ratio ■ (lhs), and the current account balance ratio ■ (lhs) to" a specified world or foreign shock. Results are annualized where applicable.
- Specific shocks illustrated:
  - Figure 12: world nonenergy commodity price markup shock which raises the price of nonenergy commodities by ten percent.
  - Figure 26: peak impulse responses to productivity shocks in systemic economies which raise their output price inflation by one percentage point.
  - Figure 27: peak impulse responses to labor supply shocks in systemic economies which raise their labor force by one percent.
  - Figure 28: peak impulse responses to consumption demand shocks in systemic economies which raise their private consumption by one percent.
  - Figure 29: peak impulse responses to investment demand shocks in systemic economies which raise their private investment by one percent.
  - Figure 30: peak impulse responses to monetary policy shocks in systemic economies which raise their nominal policy interest rate by one percentage point.
  - Figure 31: peak impulse responses to credit risk premium shocks in systemic economies which raise their short term nominal market interest rate by one percentage point.
  - Figure 32: peak impulse responses to duration risk premium shocks in systemic economies which raise their long term nominal market interest rate by one percentage point.
  - Figure 33: peak impulse responses to equity risk premium shocks in systemic economies which raise their price of equity by ten percent.
  - Figure 34: peak impulse responses to fiscal expenditure shocks in systemic economies which raise their primary fiscal balance ratio by one percentage point.
  - Figure 35: peak impulse responses to fiscal revenue shocks in systemic economies which raise their primary fiscal balance ratio by one percentage point.

### Forecast Error Variance Decompositions (Figures 13–21)
- Note: For each target variable, the horizon-dependent forecast error variance is decomposed into contributions from the following shock categories:
  - domestic supply ■, foreign supply ■, domestic demand ■, foreign demand ■, world monetary policy ■, domestic fiscal policy ■, foreign fiscal policy ■, domestic risk premium ■, foreign risk premium ■, and world terms of trade ■ shocks.
- Variables with decompositions presented:
  - Figure 13: consumption price inflation.
  - Figure 14: output.
  - Figure 15: private consumption.
  - Figure 16: private investment.
  - Figure 17: the nominal policy interest rate.
  - Figure 18: the real effective exchange rate.
  - Figure 19: the unemployment rate.
  - Figure 20: the fiscal balance ratio.
  - Figure 21: the current account balance ratio.

### Historical Decompositions (Figures 22–24)
- Note: Historical decompositions show the observed series as the sum of a trend component and contributions from the same shock categories listed above.
- Variables decomposed historically:
  - Figure 22: consumption price inflation (seasonal logarithmic difference of the price of consumption).
  - Figure 23: output growth (seasonal logarithmic difference of output).
  - Figure 24: the unemployment rate (observed level).

### Simulated Conditional Betas and Forecast Evaluation (Figures 25, 36)
- Figure 25: Simulated Conditional Betas of Output
  - Depicts betas of output with respect to contemporaneous output in systemic economies conditional on:
    - all shocks ■, macroeconomic shocks ■, and financial shocks ■.
  - Calculation: Monte Carlo simulation with 999 replications for 2T periods, discarding the first T simulated observations to eliminate dependence on initial conditions, where T denotes the observed sample size.
- Figure 36: Forecast Performance Evaluation Statistics
  - Depicts the horizon dependent logarithmic root mean squared prediction error ratio for consumption price inflation ■ and output growth ■ relative to a random walk, expressed in percent.

### Sequential Unconditional Forecasts (Figures 37–38)
- Figure 37: Sequential Unconditional Forecasts of Consumption Price Inflation
  - Depicts the cyclical component of observed consumption price inflation ■ (seasonal difference of the cyclical component of the log price of consumption) versus sequential unrestricted forecasts ■.
- Figure 38: Sequential Unconditional Forecasts of Output Growth
  - Depicts the cyclical component of observed output growth ■ (seasonal difference of the cyclical component of the log of output) versus sequential unrestricted forecasts ■.

*Source: _wp14200 - Appendix B. Tables and Figures*

### References

### _wp14200 - References

### Key theoretical and empirical macroeconomics contributions
- Calvo, G., 1983, “Staggered Prices in a Utility-Maximizing Framework”, Journal of Monetary Economics, Vol. 12, pp. 383–398.
- Christiano, L., M. Eichenbaum, and C. Evans, 2005, “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy”, Journal of Political Economy, Vol. 113, pp. 1–45.
- Erceg, C., D. Henderson, and A. Levin, 2000, “Optimal Monetary Policy with Staggered Wage and Price Contracts”, Journal of Monetary Economics, Vol. 46, pp. 281–313.
- Galí, J., 2011, “The Return of the Wage Phillips Curve”, Journal of the European Economic Association, Vol. 9, pp. 436–461.
- Lucas, R., 1980, “Two Illustrations of the Quantity Theory of Money”, American Economic Review, Vol. 70, pp. 1005–1014.
- Monacelli, T., 2005, “Monetary Policy in a Low Pass-Through Environment”, Journal of Money, Credit, and Banking, Vol. 37, pp. 1047–1066.
- Smets, F. and R. Wouters, 2003, “An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area”, Journal of the European Economic Association, Vol. 1, pp. 1123–1175.
- Vitek, F., 2013, “Policy Analysis and Forecasting in the World Economy: A Panel Dynamic Stochastic General Equilibrium Approach”, IMF Working Paper 13/253 (Washington: International Monetary Fund).

### Time-series methods, filtering, and state-space techniques
- de Jong, P., 1989, “Smoothing and Interpolation with the State-Space Model”, Journal of the American Statistical Association, Vol. 84, pp. 1085–1088.
- Engle, R. and M. Watson, 1981, “A One-Factor Multivariate Time Series Model of Metropolitan Wage Rates”, Journal of the American Statistical Association, Vol. 76, pp. 774–781.
- Hodrick, R. and E. Prescott, 1997, “Post-War U.S. Business Cycles: A Descriptive Empirical Investigation”, Journal of Money, Credit, and Banking, Vol. 29, pp. 1–16.
- Schlicht, E., 2005, “Estimating the Smoothing Parameter in the So-Called Hodrick-Prescott Filter”, Journal of the Japan Statistical Society, Vol. 35, pp. 99–119.
- Kalman, R., 1960, “A New Approach to Linear Filtering and Prediction Problems”, Transactions ASME Journal of Basic Engineering, Vol. 82, pp. 35–45.

### Numerical methods, optimization, and solution techniques for models
- Klein, P., 2000, “Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model”, Journal of Economic Dynamics and Control, Vol. 24, pp. 1405–1423.
- Storn, R. and K. Price, 1997, “Differential Evolution—A Simple and Efficient Heuristic for Global Optimization Over Continuous Spaces”, Journal of Global Optimization, Vol. 11, pp. 341–359.
- Theil, H., 1966, Applied Economic Forecasting, North Holland Press.
- Geweke, J., 2005, Contemporary Bayesian Econometrics and Statistics, Wiley.

### Institutional and policy reports
- International Monetary Fund, 2012, Annual Report on Exchange Arrangements and Exchange Restrictions, (Washington).
- International Monetary Fund, 2013, Spillover Report, (Washington).

*Source: _wp14200 - References*

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