## _wp1564 - APPENDIX I. COMPOSITION OF THE MODULES OF FSGM

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### Overview and motivation
- Purpose:
  - Deliver global macroeconomic analysis covering many more countries than structural DSGE models (GIMF, GEM).
  - FSGM contains 3 core modules, each fully encompassing the global economy; each module has 24 countries/regions.
- Core modules:
  - G20 Model (G20MOD): first completed module with an individual block for each G20 country plus four other blocks to complete the rest of the world.
  - EUROMOD and EMERGMOD are the other core modules.
- Modeling approach:
  - Semi-structural: micro-foundations for private consumption and investment; reduced-form representations for trade, labor supply, and inflation.
  - Trade-off: tractability and empirical content prioritized to allow broad country coverage.

### Model architecture and core mechanisms
- Temporal and aggregation conventions:
  - Annual, multi-region, general equilibrium, detrended by steady-state trends in population, productivity, or inflation.
- Aggregate demand identity:
  - Real GDP = household consumption + private business investment + government absorption + exports − imports.
- Private consumption:
  - Discrete-time Blanchard-Weil-Yaari OLG model with planning horizon of 20 years and an OLG household myopia parameter, .
  - Two household types: OLG households (accumulate wealth; treat government bonds as wealth) and liquidity-constrained (LIQ) households (consume all income each period).
  - Wealth components: financial wealth (domestic government bonds, net foreign assets, market value of private business capital), other wealth (lumpsum transfers less lumpsum taxes), and human wealth (discounted lifetime labor income).
  - Marginal propensity to consume out of wealth: parameter .
- Private investment:
  - Tobin’s Q investment with quadratic real adjustment costs; investment negatively correlated with real interest rates.
  - Capital-to-GDP ratio inversely related to cost of capital (depreciation, real interest rate, corporate tax, relative prices).
- Public absorption:
  - Government consumption and government investment are exogenous choices.
  - Government investment cumulates into public capital stock which permanently raises economy-wide productivity when permanently increased.
- Net exports and trade:
  - Exports increase with foreign activity and with depreciation in the Real Competitiveness Index (RCI); imports increase with domestic activity and with appreciation of the Real Effective Exchange Rate (REER).
  - Time-varying trade shares are functions of relative tradable and nontradable productivity to reproduce Balassa-Samuelson effects.
  - Global exports and imports sum to zero via adjustments using regions’ historical shares of global trade.
- Aggregate supply and potential output:
  - Potential output from Cobb-Douglas technology with trend TFP, steady-state labor force, NAIRU, and actual capital stock.
  - Trend TFP includes spillovers from other regions and public capital deviations.
- Prices and inflation:
  - Core price: CPI excluding food and energy (CPIX), modeled by a reduced-form Phillips curve (hybrid New Keynesian form with expected future inflation and past inflation inertia).
  - Headline CPI includes food and energy; investment deflator is weighted average of GDP and import deflators.
  - Separate Phillips curve for nominal wage growth with sluggish adjustment dependent on labor share gap and output gap.
- Commodities:
  - Three commodity classes: oil, food, metals.
  - Demand and supply relatively price-inelastic in short run; separate reduced-form equations for supply, consumption, exports, imports.
  - Prices decomposed into short-run cyclical and long-run trend components.
  - Commodities affect CPI (headline vs core), TFP (production costs), and CPIX Phillips curve (possible second-round effects).
- Monetary and fiscal policy:
  - Monetary policy: inflation-forecast-based interest rate rule; can respond to exchange rate deviations (flexible, fixed, monetary union, or managed float regimes possible).
  - Model includes a 10-year interest rate based on expectations theory plus term premium; consumption, investment, government debt, and NFA interest rates are weighted averages of 1-year and 10-year rates.
  - Fiscal authority chooses long-run debt-to-GDP target and can use instruments: consumption tax (VAT), labor income tax, corporate tax, lumpsum taxes, government consumption, government investment, subsidies, and transfers (general and targeted to LIQ or OLG).
  - Standard fiscal reaction: typically tax rates fixed in face of shocks; general lumpsum transfers adjust to maintain medium-term public debt-to-GDP ratio (alternative instruments possible).

### Financial, interest rate, and external sector features
- Interest rate structure:
  - Risk-free nominal 1-year rate,  , adjusted for sovereign risk premium, domestic private economy risk premium, and foreign exchange/country risk premium.
  - Fisher equation defines ex-ante 1-year real rate.
  - Monetary policy rate adjusts gradually when permanent changes in risk premia create short-run wedges.
  - 10-year nominal rate follows expectations hypothesis plus term premium; three-year moving average used for 10-year component in debt service calculations.
  - Corporate and household nominal rates are weighted averages of 1-year and 10-year rates determined by maturity structures and premia (e.g., BGG-style external financing premium with -1 < BGG1 < 0).
  - Net foreign asset interest rate is based solely on U.S. interest rates (incomplete markets; all foreign assets denominated in U.S. dollars).
- External sector and multilateral measures:
  - Trade balance, current account, and net foreign asset accumulation defined in nominal terms.
  - Uncovered interest parity holds between domestic risk-free return and foreign bond return with exchange rate risk.
  - REER uses modified import weights (based on 2012 fixed weights and adjustments for foreign trend TFP); RCI is ratio of manufacturers’ export prices to foreign prices using fixed export weights (2012) and modified import weights.

### Productivity spillovers
- Transmission:
  - Foreign TFP shocks transmit to home country TFP via bilateral trade links (imports and exports of manufactured goods).
  - Governed by pooled parameters for import and export channels (  and  ) and country-specific absorption capacity parameters (based on TFP ratios for imports and high-technology export shares for exports).
- Full-equilibrium TFP,  , equals trend TFP, own productivity shocks, and spillovers; absorption-capacity dispersion parameters influence cross-country heterogeneity.

### Calibration approach
- Two-step approach:
  1. Initial parameter values from single-equation panel estimation and structural calibration consistent with literature and other models (GIMF, GEM); country/region-specific values for selected coefficients.
     - Examples:
       - Share of liquidity-constrained households: 35 percent for advanced economies, 60 percent for emerging market economies.
       - European countries assumed to have larger investment real adjustment costs.
       - Price effects of oil and metals on consumption, investment, and TFP: negative for net importers, positive for net exporters, sized by ratio of net exports of oil/metals to GDP.
       - Commodity elasticities: very low short-term price elasticity of oil demand; slightly higher long-run elasticity; short-run income elasticity of oil demand lower for advanced economies than emerging markets; inelastic short-term supply for oil and metals; more elastic short-term demand and supply for food.
  2. System-level adjustments using full-model simulations to align dynamic properties with other structural/semi-structural models (GIMF, GEM, FRB/US, GMUSE, SIGMA).
     - Specific adjustments:
       - Tobin’s Q adjustment cost and intertemporal elasticity of substitution adjusted based on monetary policy and risk premium shock responses.
       - Reduced-form BGG financial accelerator mechanism coefficients adjusted to match GIMF aggregate demand shock responses.
       - Country-specific adjustments to import elasticities (domestic demand growth and output gap) related to trade openness.
       - Adjustments to CPIX response to REER and import price adjustment costs based on exchange rate shock properties.
       - Calibrations to replicate GEM effects of oil supply-driven oil price increases on global and regional real GDP.
- Ongoing improvements:
  - Move toward system estimation using Bayesian Simulated Method of Moments with System Priors (BSMM/SP).
  - Initial application to SIXMOD; preliminary results for U.S. block dynamics (core inflation Phillips curve dynamics, wage inflation dynamics, investment adjustment cost, intertemporal elasticity of substitution).
  - Plan to extend BSMM/SP to all FSGM modules.

### Model properties and illustrative simulation experiments
- Experiments included:
  - Temporary one-year 100 basis point increase in U.K. monetary policy rate.
  - One-year private domestic demand shocks (e.g., Canada raising real GDP by 1 percent relative to baseline).
  - Permanent increases in trend TFP in the United States, Germany, China (each raising level of real GDP by 1 percent in the long run in experiments).
  - Permanent 1 percentage point reduction in China’s household saving rate.
  - Permanent fiscal consolidations in Japan reducing fiscal deficit by 1 percent of GDP and public debt-to-GDP ratio by roughly 20 percentage points.
  - Temporary 100 basis point increases in various U.S. premia (sovereign, domestic private, corporate, term premium).
  - Permanent 10 percent increase in real global price of oil (OPEC supply reduction).
- Selected quantitative outcomes and dynamics (preserve exact reported magnitudes):
  - U.K. one-year 100 basis point policy rate increase:
    - U.K. real GDP decreases by almost ½ percent on impact.
    - CPI inflation decreases by over ¼ percentage point at its trough in the first year.
  - Canada one-year demand shock (raises real GDP by 1 percent relative to baseline):
    - Private investment increase roughly four times larger than household consumption increase.
    - Inflation rises above target by approximately ¼ of a percentage point.
    - Global effect: real global GDP rises by less 0.1 percent.
  - Trade spillovers from 1 percent domestic demand shocks:
    - Domestic investment increase roughly four times consumption increase.
    - U.S. spillovers larger than China’s because of relative size; China is close due to openness.
    - Spatial patterns: U.S. shock affects Canada and Mexico more; China shock affects Korea and Japan more; euro area spillovers almost identical from both.
  - Permanent U.S. trend TFP increases (1 percent real GDP long-run):
    - Long-run spillover to rest-of-world GDP about 1/6 of U.S. GDP increase.
    - Timing: about 1/3 of long-run benefit realized in first year; about 3/4 realized after 5 years.
    - Elasticity of substitution between home and foreign goods assumed to be 1.5 for Balassa-Samuelson calibration.
  - Permanent 1 percentage point reduction in China’s household saving rate:
    - Long run: real GDP reduced by over 1/4 percent.
    - Dynamic path: initial consumption rise; RCI initially appreciates; real GDP falls below baseline in third year and continues to decline to new steady state.
  - Japan fiscal consolidations (three consolidations each reduce fiscal deficit permanently by 1 percent of GDP; public debt-to-GDP ratio falls roughly 20 percentage points):
    - Steady state: real GDP is higher under all consolidations; global real interest rate falls; desired capital and potential output rise.
    - Transition: initial real GDP falls in all cases; largest initial decline when public consumption is reduced.
  - Temporary 100 basis point increases in U.S. interest rate risk premia:
    - Real GDP temporarily falls; declines similar across corporate, private, and sovereign premium increases.
    - Inclusion of sovereign premium induces fiscal cuts in lumpsum transfers and larger domestic demand effects.
  - Temporary 100 basis point increase in U.S. term premium:
    - Real GDP falls by roughly 1/4 percent at trough.
    - Inflation declines by slightly less than 1/4 percentage points.
  - Permanent 10 percent increase in real global oil price:
    - Global: roughly 1/2 percent reduction in real global GDP.
    - Germany: permanent reduction in real GDP of almost 3/4 percent.
    - Headline CPI inflation increases by roughly 3/4 percentage points immediately in Germany; core inflation little changed.
    - G-3 impacts: Japan hardest hit due to large net oil import position.
    - Emerging markets: both oil exporters and importers suffer; oil exporters face larger impact effects.

### Conclusions about FSGM and modeling trade-offs
- FSGM motivation and design:
  - Need for granular country coverage for IMF surveillance; fully structural multiple-goods models infeasible for many individual countries.
  - FSGM is semi-structural and eclectic, prioritizing practical functionality over strict theoretical DSGE rigor.
  - Benchmarked against DSGE models (GEM, GIMF) and adjusted to align dynamic properties.
- Current status and outlook:
  - Documented module structure and demonstrated a wide range of analytical applications.
  - Further work needed to enhance data coherence and extend framework for medium-term forecasting.
  - FSGM has proven to be a highly useful tool.

### Appendix I — Composition of the Modules of FSGM (module lists and region groupings)
- Core Modules
  - 1 - G20MOD:
    - 19 countries: ARG, AUS, BRA, CAN, CHN, FRA, DEU, IND, IDN, ITA, JPN, KOR, MEX, RUS, SAU, ZAF, TUR, GBR, USA.
    - Plus 5 regions: EA1 = Other Euro Area; EU1 = Other European Union; OA1 = Other Advanced Economies (HKG, ISL, ISR, NZL, NOR, SGP, CHE, TWN); OX1 = Other Oil Exporters (mostly OPEC); RC1 = Rest of the World.
  - 2 - EUROMOD:
    - 18 countries: AUT, BEL, CHN, FIN, FRA, DEU, GRC, IND, IRL, ITA, JPN, NLD, PRT, ESP, SWE, CHE, GBR, USA.
    - Plus 6 regions: AS2, EU2, LA2, OA2, OX2, RC2 (as listed in source).
  - 3 - EMERGMOD:
    - 9 countries: USA, JPN, CHN, HKG, SGP, CHL, VEN, NGA, ZAF.
    - Plus 15 regions: ASE, AS3, CCM, CCX, CEE, EAR, EA3, ESE, LA3, MNM, MNX, OX3, SSM, SSX, RC3 (as listed in source).
- Satellite Modules (selected examples)
  - 4 - SIXMOD: JPN, USA + 4 regions (AS4, EUA, LA4, RC4).
  - 5 - WHDMOD: 18 countries (ARG, BRA, CHL, COL, CRI, DOM, GTM, MEX, PAN, PER, TTO, URY, CAN, CHN, IND, JPN, RUS, USA) + 6 regions.
  - 6 - APDMOD: 18 countries (AUS, BGD, KHM, CHN, HKG, IND, IDN, JPN, KOR, MYS, MNG, NZL, PHL, SGP, LKA, THA, VNM, USA) + 6 regions.
  - 7 - MCDMOD, 8 - EEUMOD, 9 - AFRMOD: country lists and region groupings as provided in source.
- Summary counts reported in Appendix I:
  - Core Models: G20MOD, EUROMOD, EMERGMOD
    - 34 unique countries
    - 19 unique regions
  - Satellite Models: WHDMOD, APDMOD, MCDMOD, EEUMOD, AFRMOD
    - 35 additional unique countries
    - 13 additional unique regions

*Italic: Source: _wp1564 - APPENDIX I. COMPOSITION OF THE MODULES OF FSGM — content unit extracted from the provided IMF PDF chapter.*

### APPENDIX I. COMPOSITION OF THE MODULES OF FSGM  _________________53

### _wp1564 - APPENDIX I. COMPOSITION OF THE MODULES OF FSGM  _________________53

### APPENDIX I. COMPOSITION OF THE MODULES OF FSGM
- Title: APPENDIX I. COMPOSITION OF THE MODULES OF FSGM
- Location: page 53

### APPENDIX II. STRUCTURAL INTERPRETATION
- Title: APPENDIX II. STRUCTURAL INTERPRETATION
- Location: page 58

*Source: _wp1564 - APPENDIX I. COMPOSITION OF THE MODULES OF FSGM  _________________53*

### REFERENCES ___________________________________________________________64

### _wp1564 - REFERENCES ___________________________________________________________64

### Overview and motivation
- IMF developed the Flexible System of Global Models (FSGM) to deliver global macroeconomic analysis covering a much larger number of countries than structural DSGE models like GIMF and GEM, which are effectively constrained to 6 countries/regions.
- FSGM contains 3 core modules, each of which fully encompasses the global economy; each module has 24 countries/regions.
- The first completed module is the G20 Model (G20MOD) with an individual block for each G20 country plus four other blocks to complete the rest of the world; the other core modules are the Euro Area Model (EUROMOD) and the Emerging Markets Model (EMERGMOD).
- FSGM modules are semi-structural: key elements (private consumption and investment) have micro-foundations, while trade, labor supply, and inflation have reduced-form representations, balancing tractability and empirical content.

### Model architecture and core mechanisms
- Temporal and aggregation conventions:
  - Modules are annual, multi-region, general equilibrium, detrended by steady-state trends in population, productivity, or inflation.
- Aggregate demand:
  - Real GDP = household consumption + private business investment + government absorption + exports − imports (national expenditure identity).
- Private consumption:
  - Uses a discrete-time Blanchard-Weil-Yaari OLG model with a planning horizon of 20 years and an OLG household myopia parameter, .
  - Two household types: OLG households (accumulate wealth; treat government bonds as wealth) and liquidity-constrained (LIQ) households (do not save; consume all income each period).
  - Wealth components: financial wealth (domestic government bonds, net foreign assets, market value of private business capital), other wealth (lumpsum transfers less lumpsum taxes), and human wealth (discounted lifetime labor income).
  - Marginal propensity to consume out of wealth: parameter .
- Private investment:
  - Tobin’s Q investment with quadratic real adjustment costs; investment negatively correlated with real interest rates; capital-to-GDP ratio inversely related to cost of capital (depreciation, real interest rate, corporate tax, relative prices).
- Public absorption:
  - Government consumption and government investment (exogenous choices); government investment cumulates into public capital stock which permanently raises economy-wide productivity when permanently increased.
- Net exports and trade:
  - Exports and imports modeled with reduced-form equations: exports increase with foreign activity and with depreciation in the Real Competitiveness Index (RCI); imports increase with domestic activity and with appreciation of the Real Effective Exchange Rate (REER).
  - Time-varying trade shares are functions of relative tradable and nontradable productivity to reproduce Balassa-Samuelson effects.
  - Mechanisms ensure global exports and imports sum to zero via adjustments using regions’ historical shares of global trade.
- Aggregate supply and potential output:
  - Potential output from Cobb-Douglas technology with trend TFP, steady-state labor force, NAIRU, and actual capital stock; trend TFP includes spillovers from other regions and public capital deviations.
- Prices and inflation:
  - Core price: CPI excluding food and energy (CPIX), modeled by a reduced-form Phillips curve (hybrid New Keynesian form with expected future inflation and past inflation inertia).
  - Headline CPI includes food and energy; investment deflator is weighted average of GDP and import deflators; export and import deflators defined with competitiveness and multilateral aggregation.
  - Separate Phillips curve for nominal wage growth with sluggish adjustment and dependence on labor share gap and output gap.
- Commodities:
  - Three commodity classes: oil, food, metals.
  - Commodity demand and supply relatively price-inelastic in short run; separate supply, consumption, exports, imports reduced-form equations; prices decomposed into short-run cyclical and long-run trend components.
  - Commodities affect CPI (headline vs core), TFP (production costs), and CPIX Phillips curve (potential second-round effects).
- Monetary and fiscal policy:
  - Monetary policy: inflation-forecast-based interest rate rule with potential responses to exchange rate deviations (flexible, fixed, monetary union, or managed float regimes possible).
  - Model includes a 10-year interest rate based on expectations theory plus term premium; consumption, investment, government debt, and NFA interest rates are weighted averages of 1-year and 10-year rates.
  - Fiscal authority chooses long-run debt-to-GDP target and can use instruments: consumption tax (VAT), labor income tax, corporate tax, lumpsum taxes, government consumption, government investment, subsidies, and transfers (general and targeted to LIQ or OLG).
  - Standard fiscal reaction: under typical specification tax rates fixed in face of shocks; general lumpsum transfers adjust to maintain medium-term public debt-to-GDP ratio (alternative instruments possible).

### Financial, interest rate, and external sector features
- Interest rates:
  - Risk-free nominal 1-year rate,  , adjusted for sovereign risk premium, domestic private economy risk premium, and foreign exchange/country risk premium.
  - Fisher equation defines ex-ante 1-year real rate.
  - Monetary policy rate adjusts gradually when permanent changes in risk premia create short-run wedges.
  - 10-year nominal rate follows expectations hypothesis plus term premium; three-year moving average used for 10-year component in debt service calculations.
  - Corporate and household nominal rates are weighted averages of 1-year and 10-year rates determined by maturity structures and exogenous/endogenous premia (e.g., BGG-style external financing premium with -1 < BGG1 < 0).
  - Net foreign asset interest rate is based solely on U.S. interest rates (incomplete markets; all foreign assets denominated in U.S. dollars).
- External sector:
  - Trade balance, current account, and net foreign asset accumulation defined in nominal terms; uncovered interest parity holds between domestic risk-free return and foreign bond return with exchange rate risk.
  - Multilateral measures: REER uses modified imports weights (based on 2012 fixed weights and adjustments for foreign trend TFP); RCI is ratio of manufacturers’ export prices to foreign prices using fixed export weights (2012) and modified import weights for competition effects.

### Productivity spillovers
- Productivity spillovers from foreign TFP shocks transmitted to home country TFP via bilateral trade links (imports and exports of manufactured goods), governed by pooled parameters for import and export channels (  and  ) and country-specific absorption capacity parameters based on TFP ratios (imports) and high-technology export shares (exports).
- Full-equilibrium TFP,  , equals trend TFP, own productivity shocks, and spillovers, with absorption-capacity dispersion parameters influencing cross-country heterogeneity.

### Calibration approach
- Two-step approach:
  1. Initial parameter values from single-equation panel estimation and structural calibration consistent with literature and other models (GIMF, GEM); country/region-specific values for selected coefficients.
     - Examples of initial calibrations and assumptions:
       - Share of liquidity-constrained households: 35 percent for advanced economies, 60 percent for emerging market economies.
       - European countries assumed to have larger investment real adjustment costs.
       - Price effects of oil and metals on consumption, investment, and TFP: negative for net importers, positive for net exporters, sized by ratio of net exports of oil/metals to GDP.
       - Commodity elasticities: very low short-term price elasticity of oil demand; slightly higher long-run elasticity; short-run income elasticity of oil demand lower for advanced economies than emerging markets; inelastic short-term supply for oil and metals; more elastic short-term demand and supply for food.
  2. System-level adjustments using full-model simulations to align dynamic properties with other structural/semi-structural models (GIMF, GEM, FRB/US, GMUSE, SIGMA).
     - Specific adjustments include:
       - Tobin’s Q adjustment cost and intertemporal elasticity of substitution adjusted based on monetary policy and risk premium shock responses.
       - Reduced-form BGG financial accelerator mechanism coefficients adjusted to match GIMF aggregate demand shock responses.
       - Country-specific adjustments to import elasticities (domestic demand growth and output gap) to achieve plausible spillovers and domestic demand shock responses; related to trade openness.
       - Adjustments to CPIX response to REER and import price adjustment costs based on exchange rate shock properties.
       - Calibrations to replicate GEM effects of oil supply-driven oil price increases on global and regional real GDP.
- Ongoing calibration improvements:
  - Moving toward system estimation using Bayesian Simulated Method of Moments with System Priors (BSMM/SP), initially applied to SIXMOD; preliminary results for U.S. block dynamics (core inflation Phillips curve dynamics, wage inflation dynamics, investment adjustment cost, intertemporal elasticity of substitution).
  - Plan to extend BSMM/SP to all FSGM modules.

### Model properties and illustrative simulation experiments
- Experiments presented include: a temporary increase in U.K. monetary policy rate; temporary increases in aggregate demand in Canada; increases in U.S. trend TFP; permanent reduction in private saving in China; fiscal consolidation measures in Japan; temporary increases in various premia in the United States (sovereign, domestic private, corporate, term premium); permanent increase in real global oil price.
- Example: Temporary Increase in the Monetary Policy Rate in the United Kingdom
  - Shock: one-year 100 basis point increase in the U.K. monetary policy rate, surprise to firms and households.
  - Outcomes:
    - On impact, U.K. real GDP decreases by almost ½ percent, due to fall in domestic absorption and export demand.
    - CPI inflation decreases by over ¼ percentage point at its trough in the first year.
    - Higher real interest rates reduce private investment and household consumption (cost of capital rises, profitability declines, wealth falls).
    - Pound appreciates relative to foreign interest rates; RCI appreciation dampens export demand and lowers import prices.
    - Net effect: small increase in current account surplus in short run (imports fall more than exports).
    - Fiscal response: transfers to households increase initially (stabilization) and fiscal deficit rises in short run; later transfers reduced to restore public debt-to-GDP ratio to long-run target.
    - Monetary policy subsequently eases to return inflation to target, resulting in real interest rates temporarily below long-run level to stimulate aggregate demand.
- Example: Temporary Increase in Aggregate Demand in Canada
  - Shock: one-year private domestic demand shock calibrated to raise real GDP by one percent relative to baseline; private investment increase roughly four times larger than household consumption increase.
  - Outcomes:
    - Private investment accumulates into higher private capital stock, contributing to persistent increases in actual and potential output (potential adjusts more sluggishly).
    - Short-run output rises above potential; inflation rises above target by approximately ¼ of a percentage point.
    - Monetary authority raises policy rate; higher real interest rates raise cost of capital and reduce investment demand and near-term consumption via higher saving by OLG households.
    - Exchange rate appreciates; import prices fall, import demand rises, exports become less competitive.
    - Fiscal side: higher tax revenues improve fiscal balance; automatic stabilizers reduce general lumpsum transfers in short run; in medium run transfers are adjusted to restore debt-to-GDP target.
    - Global effect: real global GDP rises by less 0.1 percent, reflecting direct effect in Canada and spillovers; higher global demand temporarily boosts oil price.

*Italic: Source: _wp1564 - REFERENCES ___________________________________________________________64*

### 0.2 percent. In this case, the higher oil price also acts as an automatic stabilizer, dampening

### _wp1564 - 0.2 percent. In this case, the higher oil price also acts as an automatic stabilizer, dampening

### Trade spillovers from temporary one-year aggregate demand shocks
- Shock calibrated to raise real GDP by 1 percent relative to baseline; increase in private investment is roughly four times larger than the increase in household consumption.
- Domestic effects in the United States and China are roughly identical and qualitatively like the Canada aggregate demand shock results.
- U.S. spillovers are somewhat larger than China’s because of relative sizes; China is close because it is a more open economy.
- Spatial pattern of spillovers:
  - United States shock: much greater effects on Canada and Mexico.
  - China shock: much stronger relationship with Korea and Japan.
  - Euro area: almost identical spillovers from both countries.

### Permanent increase in trend total factor productivity in the United States
- Three experiments each raise level of real GDP by 1 percent in the long run; differ by sector of productivity increase: economy wide, tradable only, nontradable only.
- Long-run outcomes:
  - All cases: more investment and a higher capital stock.
  - Tradable-sector productivity increase: RCI appreciates in the long run (Balassa-Samuelson result).
  - Economy-wide productivity increase: RCI depreciates in the long run.
  - Nontradable-sector productivity increase: RCI depreciates even more than economy-wide case.
- Dynamic adjustment: most key components of real GDP reach new steady-state levels within ten years.
- Calibration note: elasticity of substitution between home and foreign goods assumed to be 1.5 for Balassa-Samuelson effect calibration.

### Productivity spillovers across countries
- Experiments: permanent increases in trend total factor productivity raising real GDP by 1 percent in the long run in each of the United States, Germany, and China.
- Timing of spillovers to rest-of-world GDP:
  - In the first year, about 1/3 of the long-run benefit is realized.
  - After 5 years, about 3/4 of the total long-run impact has materialized.
- Magnitudes:
  - Long-run spillover of the U.S. productivity increase to rest-of-world GDP is about 1/6 of the magnitude of the associated increase in U.S. GDP.
  - German and Chinese productivity increases have smaller spillovers to the rest of the world than U.S. increases.
- Reasons U.S. shock produces largest spillovers:
  - United States is calibrated as the largest economy in absolute terms.
  - United States is at the technological frontier, producing larger outward productivity spillovers.
- Germany: notable spillovers due to proximity to the technological frontier and high openness, but smaller in absolute terms because Germany is much smaller than the United States.
- China: spillovers broadly similar in magnitude to Germany’s because China is larger and open but still far from the technological frontier.

### Permanently lower household saving rate in China
- Shock: permanent 1 percentage point reduction in the rate of household saving (private saving).
- Short run: mildly positive impact on output initially.
- Long run: permanently lower savings rate reduces real GDP by over 1/4 percent; little impact on inflation.
- Steady-state adjustments:
  - Households hold fewer assets; foreigners hold more Chinese assets; China’s net foreign asset position is lower.
  - RCI depreciates in the long run.
  - Equilibrium global real interest rate rises; cost of capital rises permanently; desired capital stock falls.
  - Chinese households consume less in the long run.
- Dynamic path:
  - Initial consumption rise as households consume a larger share of income.
  - RCI initially appreciates, stimulating imports and dampening exports; current account deteriorates.
  - Firms reduce investment quickly; real GDP falls below baseline in the third year and continues to decline to new steady state.

### Permanent fiscal consolidation in Japan
- Experiments: three consolidations each reduce Japan’s fiscal deficit permanently by 1 percent of GDP, resulting in a permanent reduction in the ratio of public debt to GDP of roughly 20 percentage points.
- Credibility assumption: households and firms fully believe government plan to permanently reduce public debt-to-GDP ratio.
- Instruments considered:
  - Cut in public consumption (blue line).
  - Higher labor income taxes (red line).
  - Increase in VAT (gold line).
- Steady-state effects:
  - Real GDP is higher in the new steady state under all consolidations.
  - Higher public saving increases global supply of savings; global real interest rate falls.
  - Lower global real interest rate raises desired level of capital and potential output.
  - Reduced debt burden lowers debt-service costs; initial tightening can be partially unwound.
  - Domestic public bonds decline; households substitute foreign assets; net foreign asset position improves markedly.
  - RCI appreciates in the long run.
- Transition dynamics:
  - Real GDP initially falls in all cases; largest initial decline when public consumption is reduced.
  - Investment and net exports drive bounce back.
  - RCI initially depreciates to facilitate accumulation of net foreign assets; largest depreciation when government consumption falls, least when labor income taxes rise.
  - Current account and net foreign asset paths similar across cases.

### Temporary increase in interest rate risk premiums in the United States
- Shock: temporary but persistent 100 basis point increase in three U.S. interest rate risk premiums:
  - Corporate risk premium (affects only firms) — blue line.
  - Private sector risk premium (affects firms and households) — yellow line.
  - Sovereign risk premium (affects firms, households, and the government) — red line.
- Aggregate effects:
  - Real GDP temporarily falls; decline in output is quite similar across different premium increases.
  - Inflation declines slightly in all cases; when corporate risk premium alone increases, inflation falls by less.
- Composition differences:
  - Corporate premium increase: decline in GDP primarily driven by lower investment; employment and real wage fall; households reduce consumption.
  - Inclusion of sovereign premium: government cuts lumpsum transfers to households to offset deteriorated fiscal balance, leading to larger decline in domestic demand, larger decline in inflation, more monetary easing, more currency depreciation.
- External adjustments:
  - Reduced domestic demand compresses imports and improves real net export position.
  - Policy rate reduction leads to depreciation of real effective exchange rate, reinforcing net export improvement.
  - Current account surplus relative to baseline implies a temporary improvement in net foreign asset position.

### Temporary increase in the term premium in the United States
- Shock: 100 basis point increase in the term premium on 10-year U.S. debt instruments.
- Effects:
  - Raises effective interest rate faced by households, firms, and government.
  - Real GDP falls by roughly 1/4 percent at its trough.
  - Inflation declines by slightly less than 1/4percentage points.
- Transmission:
  - Firms reduce investment, labor demand, and wages due to higher cost of capital.
  - Households reduce consumption facing higher consumption interest rate and lower income.
  - Fiscal response: falling revenues and rising debt service costs prompt cuts to lumpsum transfers, further reducing consumption.
  - Monetary authority eases policy rate in response to lower inflation.
  - Currency appreciates because risk-adjusted real interest rate on U.S. assets rises relative to foreign assets due to higher term premium.
  - Higher real effective exchange rate yields smaller improvement in real net export position compared to rising risk premiums.
- Net effect: despite smaller impact on domestic demand than risk premium shocks, overall impact on real GDP is not much smaller.

### Permanent increase in the real global price of oil
- Shock: permanent reduction in OPEC supply leading to a long-run increase in the real global price of oil of 10 percent.
- Germany (detailed):
  - Long-run impact: permanent reduction in German real GDP of almost 3/4 percent, reached after just a few years.
  - Initial pickup in headline CPI inflation; no material change in core inflation along adjustment path.
  - Headline CPI inflation increases by roughly 3/4 percentage points immediately.
  - Households: immediate reduction in real income and wealth; consumption falls; liquidity-constrained households hit harder.
  - Firms: input costs rise and demand falls; return to capital falls; investment declines; labor demand falls.
  - Imports fall more than exports; real trade balance improves but current account deteriorates in medium term due to higher price of imported oil.
  - Net foreign asset position declines.
  - Permanent currency depreciation required to export enough to pay higher import bill and cover fall in foreign income position.
  - CPIX inflation Phillips curve permits limited persistent oil-to-core inflation pass-through; core inflation rises very little.
- Global and regional impacts:
  - Permanent 10 percent increase in price of oil takes roughly 1/2 percent off real global GDP.
  - G-3 economies: Japan hardest hit because of large net oil import position.
  - Impacts on United States and euro area similar despite higher oil cost share in U.S. GDP because U.S. domestic oil production and U.S. energy firms/households benefit.
  - Emerging market economies: both oil exporters and importers suffer; oil exporters face larger impact effects due to supply reduction and domestic economy effects.
  - China: negative impact is large because of high net oil import position.
- Contrast with temporary shock:
  - Temporary 1-year 10 percent increase in real oil price has notably smaller global GDP impact because firms and households treat it as temporary and adjust behavior only temporarily.

### Conclusions about FSGM and modeling trade-offs
- Motivation: need for high level of individual country granularity for IMF multilateral and bilateral surveillance; infeasible to expand coverage in fully structural multiple-goods models like GEM and GIMF to many individual countries simultaneously.
- Design choice: FSGM is a semi-structural, eclectic framework prioritizing practical functionality over theoretical rigor.
- Relationship to DSGE models: FSGM deviates from theoretical DSGE models but draws heavily from them and is benchmarked against DSGE models like GEM and GIMF.
- Current status and outlook:
  - FSGM documented module structure and demonstrated a rich array of issues it can analyze.
  - Further work needed to enhance data coherence and extend framework for medium-term forecasting applications.
  - Already proven to be a highly useful tool.

*Italic: Source — content unit from the IMF PDF chapter provided.*

### Appendix I: Composition of the Modules of FSGM

### Appendix I: Composition of the Modules of FSGM

### CORE MODULES — Module compositions and region groupings
- 1 - G20MOD:
  - 19 countries (80-85 percent of global GDP)
  - ARG,AUS,BRA,CAN,CHN,FRA,DEU,IND,IDN,ITA,JPN,KOR,MEX,RUS,SAU,ZAF,TUR,GBR,USA
  - Plus 5 regions:
    - EA1 = Other Euro Area
    - EU1 = Other European Union
    - OA1 = Other Advanced Economies (HKG,ISL,ISR,NZL,NOR,SGP,CHE,TWN)
    - OX1 = Other Oil Exporters (mostly OPEC)
    - RC1 = Rest of the World

- 2 - EUROMOD:
  - 18 countries
  - AUT,BEL,CHN,FIN,FRA,DEU,GRC,IND,IRL,ITA,JPN,NLD,PRT,ESP,SWE,CHE,GBR,USA
  - Plus 6 regions:
    - AS2 = Newly Industrialized Asia excluding China and India (HKG,IDN,KOR,MYS,PHL,SGP,THA,TWN)
    - EU2 = Other European Union (BGR,CZE,DNK,HUN,POL,ROM,SVK,SVN,CYP,EST,LVA,LTU,LUX,MLT)
    - LA2 = Latin America (ARG,BRA,CHL,COL,MEX,PER)
    - OA2 = Other Advanced Economies (AUS,CAN,ISL,ISR,NZL,NOR)
    - OX2 = Oil Exporters (mostly OPEC, Russia)
    - RC2 = Rest of the World

- 3 - EMERGMOD:
  - 9 countries
  - USA,JPN,CHN,HKG,SGP,CHL,VEN,NGA,ZAF
  - Plus 15 regions:
    - ASE = ASEAN-3 (MYS,PHL,THA)
    - AS3 = Rest of Emerging and Newly Industrialized Asia (including IND,IDN,KOR)
    - CCM = Caucasus and Central Asia Oil Importers
    - CCX = Caucasus and Central Asia Oil Exporters
    - CEE = Central Europe (CZE,HUN,POL)
    - EAR = Euro Area Region (excludes EST,LVA,LTU,SVK,SVN)
    - EA3 = Emerging Euro Area (EST,LVA,LTU,SVK,SVN)
    - ESE = Eastern and Southeastern Europe
    - LA3 = Other Latin America (including ARG,BRA,MEX)
    - MNM = Middle East and North Africa Oil Importers
    - MNX = Middle East and North Africa Oil Exporters
    - OX3 = Other Oil Exporters (mainly NOR,RUS)
    - SSM = Sub-Saharan Africa Oil Importers
    - SSX = Sub-Saharan Africa Oil Exporters
    - RC3 = Rest of the World (AUS,CAN,DNK,ISL,ISR,NZL,SWE,CHE,GBR,MNG,TUR)

### SATELLITE MODULES — Module compositions and region groupings
- 4 - SIXMOD:
  - 2 countries
  - JPN, USA
  - Plus 4 regions:
    - AS4 = Emerging and Newly Industrialized Asia
    - EUA = Euro Area
    - LA4 = Latin America 5 (BRA, CHL, COL, MEX, PER)
    - RC4 = Rest of the World

- 5 - WHDMOD (Western Hemisphere Department):
  - 18 countries
  - ARG,BRA,CHL,COL,CRI,DOM,GTM,MEX,PAN,PER,TTO,URY,CAN,CHN,IND,JPN,RUS,USA
  - Plus 6 regions:
    - CA5 = Other Central America (SLV,HND,NIC)
    - EUA = Euro Area
    - LA5 = Other Latin America
    - OA5 = Other Advanced Economies (AUS,DNK,HKG,ISL,ISR,KOR,NZL,NOR,SGP,CHE,SWE,TWN,TUR,GBR)
    - OX5 = Oil Exporters
    - RC5 = Rest of the World

- 6 - APDMOD (Asia and Pacific Department):
  - 18 countries
  - AUS,BGD,KHM,CHN,HKG,IND,IDN,JPN,KOR,MYS,MNG,NZL,PHL,SGP,LKA,THA,VNM,USA
  - Plus 6 regions:
    - EUA = Euro Area
    - LAT = Latin America
    - OA6 = Other Advanced Economies (CAN,ISL,ISR,ZAF,CHE,TWN,TUR,GBR + Eastern Europe, Scandinavia)
    - OX6 = Oil Exporters
    - PIC = Pacific Island Countries
    - RC6 = Remaining Countries

- 7 - MCDMOD (Middle East and Central Asia Department):
  - 12 countries
  - CHN,JPN,RUS,USA,ARM,EGY,GEO,IRN,KAZ,MAR,PAK,SAU
  - Plus 11 regions:
    - AS7 = Emerging Asia
    - CM7 = Central Asia and Caucasus Oil Importers
    - CX7 = Central Asia and Caucasus Oil Exporters
    - EUA = Euro Area
    - EU7 = Other European Union
    - GCX = Other GCC Oil Exporters
    - LAT = Latin America
    - MN7 = Other Middle East and North Africa Oil Importers
    - OA7 = Other Advanced Economies (AUS,CAN,GBR,HKG,ISL,ISR,KOR,NZL,NOR,SGP,CHE,TWN)
    - OX7 = Other Oil Exporters
    - RC7 = Remaining Countries

- 8 - EEUMOD (European Department):
  - 13 countries
  - CHN,JPN,USA,BGR,HRV,CZE,HUN,POL,ROM,RUS,SRB,TUR,UKR
  - Plus 11 regions:
    - AS8 = Emerging Asia
    - CIS = CIS excluding Russia (BLR,MDA)
    - EA8 = Emerging Euro Area (EST,LVA,LTU,SVK,SVN)
    - EC8 = Core Euro Area (AUT,BEL,DEU,FIN,FRA,IRL,NLD,PRT)
    - EP8 = Euro Area Periphery (GRC,ITA,ESP,CYP)
    - ES8 = Eastern and Southeastern Europe (ALB,BIH,KOS,MKD,MNE)
    - EU8 = Other European Union (DNK,SWE,GBR)
    - LAT = Latin America
    - OA8 = Other Advanced Economies (AUS,CAN,HKG,ISL,ISR,KOR,NZL,NOR,SGP,CHE,TWN)
    - OX8 = Oil Exporters
    - RC8 = Rest of the World

- 9 - AFRMOD (African Department):
  - 13 countries
  - USA,CHN,FRA,DEU,IND,ITA,JPN,GBR,AGO,GHA,NGA,ZAF,ZMB
  - Plus 11 regions:
    - EA9 = Other Euro Area
    - EAF = Eastern Africa (KEN,RWA,TZA,UGA)
    - FAF = Fragile Africa (BFA,BDI,CIV,CAF,COD,COM,ERI,GIN,GNB,STP,SLE,TGO,LBR,ZWE)
    - LAT = Latin America
    - LIA = Low Income Africa (ETH,GMB,MDG,MWI,MOZ)
    - MIA = Middle Income Africa (BWA,CPV,LSO,MUS,NAM,SEN,SYC,SWZ)
    - OA9 = Other Advanced Economies (AUS,CAN,DNK,HKG,ISL,ISR,KOR,NZL,NOR,SGP,SWE,CHE,TWN)
    - OX9 = Other Oil Exporters
    - SX9 = Sub-Saharan Africa Oil Exporters
    - WMU = West African Economic and Monetary Union, WAEMU (BEN,MLI,NER)
    - RC9 = Remaining Countries

### Summary counts reported in Appendix I
- Core Models: G20MOD, EUROMOD, EMERGMOD
  - 34 unique countries
  - 19 unique regions
- Satellite Models: WHDMOD, APDMOD, MCDMOD, EEUMOD, AFRMOD
  - 35 additional unique countries
  - 13 additional unique regions

*Appendix I: Composition of the Modules of FSGM — source content extracted from the provided PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1564.pdf_