Download the model: DOS version
Country models: Canada
Rest of the World, Developing Countries
Small Industrial Countries
Frequently Asked Questions
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GEM: A New International Macroeconomic Model
MULTIMOD Mark III Econometric Model
The core Mark III model includes explicit country sub-models for each of the seven largest industrial countries and an aggregate grouping of 14 smaller industrial countries. The remaining economies of the world are then aggregated into two separate blocks of developing and transition economies. Extended versions of MULTIMOD include separate sub-models for many of the smaller industrial countries, and work has been initiated on expanding the analysis of the developing and transition economies.
The basic structure and properties of MULTIMOD are meant to represent a synthesis of collective wisdom about how modern industrial economies function and interact with each other. A consistent theoretical structure is employed for all industrial economies, and cross-country differences in the behavior of agents (or the functioning of markets) are reflected in different estimated parameter values. The model converges to a balanced-growth path that is characterized by a full stock-flow equilibrium in which debtor countries service the interest payments on their net foreign liabilities with positive trade balances.
The MULTIMOD modeling system includes a well-defined steady-state analogue model for each country and for the world economy as a whole. These steady-state models serve two roles. First, they are used to construct terminal conditions for the dynamic models. Second, they can be used to study the long-run effects of shocks that have permanent consequences for saving, capital formation, output, real interest rates, real exchange rates, etc. The basic structure of the model is simple enough that it is fairly straightforward to estimate additional country models for the smaller industrial economies.
Despite the focus on medium-run and long-run properties, MULTIMOD also exhibits important short-run Keynesian dynamics that result from significant inertia in the inflation process. The MARK III generation features a nonlinear relationship between unemployment and inflation that reflects short-run capacity constraints and insider-outsider influences on wage setting. The asymmetric property of the Phillips curve provides a fundamental role for stabilization policies that is absent from linear models of the business cycle.
MULTIMOD assumes that behavior is completely forward-looking in asset markets and partially forward-looking in goods markets, but it is possible to study the effects of shocks under alternative assumptions about expectations formation and the degree of policy credibility. The model is solved with state-of-the-art simulation algorithms that have been designed specifically for such systems of equations.
Consumption/saving behavior is based on an extended Blanchard-Weil-Buiter paradigm where agents are assumed to have finite planning horizons. The model has been extended to allow for realistic life-cycle income profiles and for the fact that a significant proportion of consumers are constrained by their disposable incomes insofar as they are unable to borrow against future labor income streams.
Investment behavior is based on Tobin's Q theory, according to which the desired rate of investment exceeds the steady-state rate as long as the expected marginal product of capital is greater than its replacement cost. The model allows for significant adjustment costs.
MULTIMOD has a standard specification of import and export behavior that embodies the notion that countries trade in diversified products. Import volumes are a function of the main components of aggregate demand, with import contents of the different components calibrated on the basis of detailed information from input-output tables. Exports are modeled to approximately represent the mirror image of the foreign import demand functions.
Exchange rates and interest rates are related by an adjusted interest parity condition that can allow for persistent risk premia. MULTIMOD provides a fundamental role for the real exchange rate, both in equilibrating aggregate demand and supply in the goods market and in ensuring that flow relationships are consistent with consumers’ desired rates of asset accumulation. The short-run properties of the model to some extent mimic the properties of the Dornbusch overshooting model insofar as asset market prices are free to jump while prices are characterized by stickier intrinsic and expectational dynamics.
The fiscal policy instruments include government absorption, distortionary capital taxes, and nondistortionary labor taxes. In the core version of MULTIMOD, government absorption is exogenous and the aggregate tax rate is endogenized to ensure that the ratio of government debt to GDP converges to a target level. However, in the short run it is possible to treat all three fiscal instruments as exogenous variables.
Given the forward-looking nature of MULTIMOD, the fundamental role of the monetary authorities is to provide an anchor for inflation expectations. This can be accomplished in many ways. Options available in the core version of Mark III include fixed exchange rate bands (of any given width), money targeting, inflation targeting, and nominal income targeting.
MULTIMOD has not been designed to be a forecasting tool! The baseline scenarios are taken from the medium-term World Economic Outlook projections, which reflect the detailed knowledge and judgments of the Fund's country economists. These medium-term projections are then extended into a model-consistent balanced-growth path where the real interest rate is greater than the world real growth rate.