A Small Open Economy DSGE Model for an Oil Exporting Emerging Economy

Transcription

1 A Small Open Economy DSGE Model for an Oil Exporting Emerging Economy Iklaga, Fred Ogli University of Surrey Presented at the 33rd USAEE/IAEE North American Conference, October 25-28, 2015, Pittsburgh, USA October 28, 2015 Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

2 Overview 1 Research agenda Modelling Strategy Current Work 2 Models Standard SOE DSGE Model Augmented SOE DSGE Model Policy 3 Model Calibration and Results Calibration Simulated Results Preliminary Estimates 4 Conclusions Moving ahead Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

3 Research agenda Modelling Strategy Modelling Plan Develop a micro-founded DSGE model fit for purpose for an Oil Exporter i Incorporate important features peculiar to emerging economies ii From standard SOE NK DSGE to SOE NK DSGE model with Oil production sectors, Endogenous Fiscal Policy, and Informal and Formal Sectors iii Estimate model via Bayesian-Methods with priors from related research and data iv Undertake quantitative analysis. Assess the welfare implications with various policy rules, particularly focusing on the policy responses to oil price developments Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

4 Research agenda Modelling Strategy Modelling Plan... Questions: Do the new features improve the fit of the model? Are the DSGE estimates informative about the Nigerian economy? Estimate and analyse to: - Validate model - Assess statistical properties - Analyse impulse response functions Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

5 Research agenda Current Work Work so far Current paper: develops an open economy model with financial frictions, oil production sector and endogenous fiscal policy Model Calibrated to fit the stylize facts of typical SOE oil exporter Papers on the open economy: [Gabriel et al.(2010)], drawing on [Batini et al.(2010)], [Berg et al. (2013)], [Batini et al.(2009)] and [Gali and Monacelli(2005)] Papers on the Informal Economy: a survey [Batini et al.(2010b)] and a study of monetary policy and the informal economy Related paper: [Anand et al.(2010)], Bergholt [2014] Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

6 Research agenda Current Work Some Stylized Facts Nigerian Economy Total GDP: USD521.8 billion Oil Exports/Total Exports: 91.6 per cent (OPEC, AR) OIL/GDP: 33 per cent ( ) Size of Informal Sector: 58 per cent Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

7 Research agenda Current Work Some Stylized Facts... As highlighted in [Sen and Kolli(2009)], [Rada(2009)] and more recent work by [Fox (2015)] some broad characteristics of the informal sector are Size: 50 per cent of GDP 90 per cent workforce Ownership: usually by individual or household enterprises Output: marketable goods and services Bookkeeping: No complete accounts Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

8 Research agenda Current Work Modelling in stages Objective is to build up model in stages Model 1: A standard Open economy NK model calibrated to fit the stylized facts of the Nigerian Economy Model 2: Model 1 plus non-ricardian households, oil production sector and endogenous fiscal policy Model 3: Add informal sector with labour market frictions Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

9 Models Standard SOE DSGE Model Optimizing Agents At the core is an RBC model with: Representative households optimizes it s intertemporal utility-maximizing choice of consumption and labour supply over time subject given budget constraints Firms producing output according to a production technology and choose labour and capital inputs to maximize profits Labour, output and financial markets clear Add investment adjustment costs Add monopolistic competition in retail market and price stickiness Add Macroeconomic policy via a monetary policy rule Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

10 Models Standard SOE DSGE Model Households Households Euler equations and marginal utilities: [ ] 1 ΛC,t+1 = βe t R n,t Λ C,t Π t+1 W t = Λ L,t = Λ h,t P C,t Λ C,t Λ C,t Λ = (C(1 χ))(1 ϱ) (1 h) ϱ ) 1 σc 1 1 σ c Λ C = (1 ϱ)(c(1 χ)) (1 ϱ)(1 σc) 1 ((1 h) ϱ(1 σc) ) Λ L = ϱ(c(1 χ)) (1 ϱ)(1 σc) (1 h) ϱ(1 σc) 1 Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

11 Models Standard SOE DSGE Model Firms Firms maximize profits: Yt W = (A t h t ) α Kt 1 α Y t = (1 c)yt W K t+1 = (1 δ)k t + (1 S(X t ))I t S, S 0 ; S(1 + g) = S (1 + g) = 0 X t = I t I t 1 S(X t ) = φ I 2 (X t 1) 2 P I,t P C,t = Q t (1 S(X t ) X t S (X t )) + E t [ Q t+1 S (X t+1 ) (R t ) I 2 t+1 I 2 t ] Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

12 Models Augmented SOE DSGE Model Additional frictions non-ricardian households Λ = (C 2(1 χ)) (1 ϱ) (1 h) ϱ ) 1 σc 1 1 σ c Λ C2 = (1 ϱ)(c 2 (1 χ)) (1 ϱ)(1 σc) 1 ((1 h) ϱ(1 σc) ) C 1,t = W th t P t = Wage Income C t = λc 1,t + (1 λ)c 2,t Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

13 Models Augmented SOE DSGE Model Oil production sector Oil price is assumed to follow a random walk without a drift as estimated in Hamilton (2009), log p O t = log p O t 1 + ε po t, For simplification resource production in the model is financed by capital ϕ investments in oil sector, which follows an AR(1) process, log ϕ t = ρ ϕ log ϕ t 1 + ε ϕ t, where both shocks follow the process ε po,ϕ t Resource capital evolves according to K O t = (1 δ O )K O t 1 + ϕ t. i.i.d.n(0, σ 2 po,ϕ) Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

14 Models Augmented SOE DSGE Model Oil production sector Oil production takes the form a simplified Cobb-Douglas production technology without labour input: Y O t = z O t (K O t 1) αo, where z O t is resource TFP which follows an AR(1) process, log z O t = ρ zo log z O t 1 + ε zo t, ε zo t i.i.d.n(0, σ 2 zo) is the oil production technology shock. Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

15 Models Policy Monetary Policy log(r n,t /R n ) = ρ r log(r n,t 1 /R n ) + (1 ρ r )(θ π E t [log Π t+1 ]/Π + θ s log S t /S) + ɛ r,t+1 Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

16 Models Policy Fiscal Policy Resource production proceeds depend on τt O a proxy for both royalties and profit taxes and paid each period as [ ] Tt O = s t τt O p O Government budget constraint is given by g t = tt O + d t + R t 1 d t 1, t y O t where g, t and d are real variables deflated by output. Fiscal rule d t = ρ g d t 1 + ɛ d t Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

17 Models Policy Model Structure Structure2.png Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

18 Model Calibration and Results Calibration Calibration Calibrated parameter Symbol Value for Nigeria Discount factor β Depreciation rate δ Risk aversion σ 2.00 Consumption habit h C 0.70 Calvo prices ξ 0.75 Labour share α 0.60 Preference parameter ϱ 0.61 Substitution elasticity (H/F goods) µ 1.50 Investment substitution ρ I 0.50 Risk premium elasticity χ B 0.50 Substitution elasticity (Others) ζ 0.50 Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

19 Model Calibration and Results Calibration Calibration... Calibrated parameter Symbol Value for Nigeria Proportion of RT consumers λ 0.23 Risk premium - scaling κ B 1.00 Interest rate smoothing ρ rh 0.50 Feedback from expected inflation θ ph 2.00 Feedback from exchange rate θ sh 0.50 Imported investment share is import 0.15 Imported consumption share cs import 0.10 Exported investment share is export 0.02 Exported consumption share cs export 0.23 Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

20 Model Calibration and Results Simulated Results Theoretical Moments Standard Deviation Interest Exchange Model Output Inflation rate rate NK SOE NK SOE OIL Autocorrelations (1) Interest Exchange Model Output Inflation rate rate NK SOE NK SOE OIL Table: Selected Second Moments Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

21 Model Calibration and Results Simulated Results Figure: IRFs Technology Shock Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

22 Model Calibration and Results Simulated Results Figure: IRFs Foreign Shock Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

23 Model Calibration and Results Simulated Results Figure: IRFs Mark-up Shock Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

24 Model Calibration and Results Simulated Results Figure: IRFs Government Spending Shock Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

25 Model Calibration and Results Preliminary Estimates Data and measurement Equations GDP t log(cpi t CPI t 1 ) 3MDR t /4 REER t = log ( ) Y t Y log ( Π t ) ( Π ) 1+Rn,t log 1+R n log ( REER t ) REER Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

26 Model Calibration and Results Preliminary Estimates Figure: Standard deviation of I.I.D. Shocks Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

27 Model Calibration and Results Preliminary Estimates Figure: Standard of I.I.D. Shocks Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

28 Conclusions Moving ahead Work-in-progress Policy implications: how should monetary policy respond to oil price shocks in Nigeria Steady-State Assumption: A non-growth zero-inflation steady state a simplification [Schmitt-Grohe and Uribe(2008)]. Incomplete exchange rate pass-through more realistic Add informal sector and do the policy analysis to complete the project Model 1: A standard SOE NK model Model 2: SOE NK model with financial frictions and Oil Model 3: SOE NK model with financial frictions, Oil and informal sector Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29

29 Conclusions Moving ahead The End Iklaga, Fred Ogli (CIMS) SOE DSGE for Oil Exporter October 28, / 29