Forecasting and Monetary Policy Analysis in Emerging Economies: The case of India (preliminary)

Transcription

1 Forecasing and Moneary Policy Analysis in Emerging Economies: The case of India (preliminary) Rudrani Bhaacharya, Pranav Gupa, Ila Panaik, Rafael Porillo New Delhi 19 h November This presenaion should no be repored as represening he views of he NIPFP or he IMF. The views expressed here are hose of he auhors and do no necessarily represen hose of he NIPFP or he IMF. This describes research in progress by he auhors and is designed o elici commen and o furher debae.

2 Ouline of Presenaion Inroducion on FPAS model Simple oupu gap model for India Daa and calibraion Inerpreing he resuls Impulse Response Funcions Hisorical Decomposiion Forecasing Exensions/Conclusion

3 Forecasing and Policy Analysis Sysem (FPAS) models Wha are he differen forecasing models VAR, DSGE, FPAS o o VAR, VECM ec for shor erm forecasing, FPAS for medium erm forecasing. Convergence beween empirically moivaed IS/LM models and DSGE model ha akes ino accoun expecaion and are micro-founded. Wha is a FPAS model? o o A srucural model as each of is equaions has an economic inerpreaion New Keynesian emphasis on nominal and real rigidiies and a role of aggregae demand in oupu deerminaion. How and where are hey used? o Useful where fundamenal role of moneary policy is o provide anchor o inflaion and inflaion expecaion. Advanages of using FPAS model. o o Medium erm forecasing Scenario analysis

4 Srucural model for India The model has 4 main feaures (behavioral equaions) Aggregae demand side (IS curve) Supply side (Phillips curve) Moneary policy (Taylor rule) Exchange rae (UIP condiion)

5 Aggregae Demand (IS Curve) Describes he behavior of aggregae demand in India. Oupu gap depends on Own lagged value/pas level Real moneary condiions o Real exchange rae gap o Real ineres rae gap Expeced oupu gap Foreign oupu gap Shock Forward looking Moneary Policy (Taylor rule) Describes behavior of he cenral bank The cenral bank reacs o When expeced inflaion deviae from price objecive o While aking ino accoun real economic aciviy Or does no reac : policy shock

6 Aggregae supply (Phillips Curve) Describes he supply side of Indian economy. Inflaion depends on Own lagged value/pas level Inflaion expecaion Real Marginal cos o Real exchange rae gap o Oupu gap Shock Exchange rae (UIP) Relaes domesic and foreign ineres rae wih expeced change in exchange rae. Exchange rae depends on Domesic ineres rae Foreign ineres rae Premium PPP condiion shock

7 FPAS: Schemaic Transmission Mechanism LR ineres raes Inflaion expecaions SR ineres rae RMCI Oupu gap Inflaion Ex rae Shocks hiing he economy Financial shocks: Foreign Ineres raes Porfolio changes Demand shocks: Foreign demand Fiscal policy Inflaion shocks: Indirec axes Energy prices, Food prices Source: Doughlas Laxon (2009)

8 Daa Inflaion: WPI indices Ineres rae: 91 days T-bill rae Oupu: GDP a consan price ( ) Exchange rae: INR/USD Foreign ineres rae: Fed shor erm ineres rae Foreign oupu: GDP a consan price Foreign Inflaion: CPI indices

9 Seady sae values Calculaed based on hisorical daa and judgmen abou Indian economy. Inflaion arge Real ineres rae rend Real exchange rae rend Oupu rend Foreign real ineres rae rend Foreign inflaion arge r r T ss ss z y * ss * ss ss ss

10 Model Equaion and Calibraion Aggregae Demand (IS Curve) yˆ 0.75ˆ y F ˆ r ˆ z ˆ y yˆ yˆ Aggregae supply (Phillips Curve) 0.72 E ˆ Forward looking Moneary Policy (Taylor rule) i Exchange rae (UIP condiion) ˆ 0.69i 1 n ar i r zˆ 0.31( i n e 0.79 yˆ 1.23( E ) 0.75 yˆ ar E 4 4 s 0.7s 0.31s ( i i prem )/ 4 s e 1 s 1 z 0.5( s z cpi * * ar wpi us ss ) ) s i

11 Aggregae demand shock Giving 1% emporary shock in firs quarer in oupu gap equaion Source: Auhor s calculaion

12 Aggregae supply shock Giving 1% emporary shock in firs quarer in Phillips equaion (QoQ) Source: Auhor s calculaion

13 Hisorical decomposiion of oupu gap and ineres rae Dashed line: acual minus shock Solid line: acual Source: Auhor s calculaion

14 Source: Auhor s calculaion Shock decomposiion of Inflaion

15 Explaining a hisorical episode expansion During period, acual moneary policy rae remained below he pah implied by Taylor rule. This accommodaive moneary policy in conribued o high persisen inflaion, and also pushed aggregae demand high. High aggregae demand because of governmen fiscal simulus and accommodaive moneary policy led inflaion o rise during period.

16 Curren scenario Slowing down of invesmen in 2013 is causing oupu gap o fall furher capured by exogenous shock o aggregae demand equaion. Model suggess ha RBI should ighen is moneary policy in response o high inflaion expecaions, which RBI did.

17 Forecasing Assumpions for baseline scenario: 1. US Fed ineres rae forecas : WEO, IMF 2. US Inflaion forecas : WEO, IMF 3. US GDP forecas : WEO, IMF 4. Srucural consrains Year US Inflaion US - Shor erm ineres raes US- GDP growh rae

18 Baseline model forecas Wih 50% and 95% confidence inerval Wih 50% and 95% confidence inerval Source: Auhor s calculaion

19 Scenario 1: Aggressive apering Aggressive scenario: Tapering sars earlier han expeced, Fed shor erm ineres rae become 1.42% by end of Year (average) WEO projecion (US shor erm ineres rae) Aggressive apering (US shor erm ineres rae) Source: WEO, IMF/US FED

20 Source: Auhor s calculaion Scenario 1: Aggressive apering

21 Scenario 2: Fiscal expansion in Quarer Fiscal Policy Magniude (shock in aggregae demand) 2013Q4 Fiscal conracion Q1 Fiscal conracion Q2 (Elecion quarer) Reurn o normalcy Q3 Fiscal expansion Q4 Fiscal expansion Q1 Fiscal expansion Q2 Fiscal expansion 0.3

22 Scenario 2: Fiscal expansion in Source: Auhor s calculaion

23 Furher work Exending he model o incorporae disaggregaed inflaion (core, food and oil). Exending he model o incorporae CPI. Adding fiscal block in he model.

24 Thank you