A Preamble. Basic features of the data: Inspecting and plotting (trends, outliers, volatility) Basic descriptive summary statistics

Transcription

1 A Preamble Basic features of the data: Inspecting and plotting (trends, outliers, volatility) Basic descriptive summary statistics Use judgment once a projection is obtained. Revise if necessary to ensure economic and accounting consistency.

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3 Review of Basic Concepts Real sector refers to real economic transactions of an economy. (NIPA) Gross Domestic Product (GDP): the market value of all final goods and services produced within a country in a given period. Nominal GDP (Y): measures the total value of production at current prices. Real GDP (RY): focuses on changes in GDP that reflect changes in quantities, rather than changes in prices. GDP deflator (PGDP): an index that measures the average price of goods and services produced relative to a base year.

4 Potential Output and Output Gap Potential Output A measure of sustainable output. Output Gap A measure of the business cycle position. [(RY Y p )/ Y p ] * 100

5 Output Gap and Unemployment in the U.S Output gap (% of Potential GDP) Unemployment Rate (RHS axis, in %) 2 0 Source: WEO, Oct. 2014

6 Supply Side: Determinants of Output Y= f(k, L, A) Question: How to estimate potential output? Production Function Approach Time Series Techniques (univariate, multivariate)

7 Projection of Potential GDP in Macronia Deterministic Trend Ln (RY t ) = α + β*t + ε t

8 Macronia: Potential GDP Forecast Ln (RY t ) = *t Residual Actual Fitted

9 A Pragmatic Approach: Projection of GDP Forecast real GDP growth from information provided and judgment. RY t+1 = RY t *(1+g/100)

10 Demand Side: Projection of Expenditure GDP = (Cp + Cg) + (Ip + Ig) + (X M)

11 Determinants of Private Consumption Cp = f ( YD, YD e, wealth, real interest rate, uncertainty, credit, ) Disposable Income (in the current period), YD (+) Expectations (consumer confidence indexes, employment growth), YD e (+) Wealth (stock market performance, housing prices) (+) Uncertainty (precautionary saving) (-) Availability of Credit (+) Real Interest Rate (?) Substitution effect (-) Income effect (+)

12 Private Consumption (% of GDP) 70% United States 80% Brazil 68% 75% Share of GDP 66% 64% Share of GDP 70% 65% 60% 62% 55% 60% 50% 68% 66% 64% South Africa 55% 50% Malaysia Share of GDP 62% 60% 58% 56% 54% Share of GDP 45% 40% 35% 52% 50% 30%

13 Projection of Real Private Consumption Approach 1 (naïve): RCp 2014 = (RCp 2013 /RY 2013 )*RY 2014 Approach 2 (econometric): ΔLn(RCp t ) = c + β*δ Ln(RGNDI t ) λ*[ln(rcp t-1 ) - δ*ln(rgndi t-1 )] + ε t

14 Error Correction Model ΔLn(RCp t ) = *Δ Ln(RGNDI t ) 0.41*[Ln(RCp t-1 ) 0.88*Ln(RGNDI t-1 )] Residual Actual Fitted

15 Determinants of Private Investment Ip = f ( RY, ΔRY, Factor costs, RER, interest rates, credit, uncertainty, volatility, ) Current and expected future demand, RY, ΔRY (+) Factor Costs: wages, energy prices (-) Competitiveness: real exchange rate Availability and Cost of Credit: interest rates and monetary aggregates (+/-) Uncertainty: macroeconomic, and political volatility (-)

16 Private Investment (% of GDP) Share of GDP 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% United States Share of GDP 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% Brazil Share of GDP 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% South Africa Share of GDP 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% Singapore

17 Projection of Private Investment Approach 1 (naïve): RIp 2014 = (RIp 2013 /RY 2013 )*RY 2014 Approach 2 (econometric): Ln(RIp t ) = c + β 1 *Ln(RY t ) + β 2 *RIBR t + ε t

18 Review of Basic Concepts Inflation is a sustained increase in the general level of prices of goods and services in an economy. CPI measures the cost of a basket of goods and services purchased by a typical household for consumption in some base period. The CPI and the GDP deflator cover different sets of goods and services.

19 Determinants of Inflation Demand side factors Example: excess demand (YGAP > 0) leads to inflationary pressures. Supply side factors Example: supply shocks such as oil prices, terms of trade, food prices. Economic policy (fiscal, monetary, exchange rate) Affects inflation through various transmission channels.

20 Phillips Curve The standard formulation for a small open economy: π t = (1- ρ)*e(π t+1 ) + ρ*π t-1 + β*ygap t + ϒ*RERgap t + V t

21 Inflation and the Output Gap in the U.S Output gap (% of Potential GDP) CPI Inflation (RHS axis, in %) Source: WEO, Oct. 2014

22 Forecasting Inflation in Macronia Apply a simplified Phillips Curve to Macronia data: π t = c + ρ*π t-1 + β*ygap t + ϒ*RERgap t + ε t Use the fitted values to obtain a forecast of inflation. We focus on average CPI inflation in the regression.

23 Estimated Phillips Curve π t = *π t *ygap t *RERgap t Residual Actual Fitted

24 Initial Projection of Nominal GDP Use our forecast of CPI inflation to formulate an initial guess for % PGDP. Y = RY*PGDP/100

25 Projecting Component Deflators Consumption: % PC = % CPI Investment: % PI = (1-a)*% CPI + a*% PM Export: % PX = ((1+% P of X in US$/100) * (1+% NER/100) 1) * 100 Import: % PM = ((1+% P of M in US$/100) * (1+% NER/100) 1) * 100

26 Looking Beyond the Real Sector Household and corporate incomes also dependent on taxes, transfers and net factor income from abroad. Financing of investment will also depend on government balances, external finance and credit from the banking system. Forecasts have to take into account interrelations among sectors: we need both accounting and economic coherence.

27 Looking Beyond the Real Sector Interest Rates (Monetary) Exchange Rates (External sector) Government Investment and Government Consumption (Fiscal) Net Exports (External)