The Bank of Thailand™s Practical Model-Based Forecasting and … · 2019. 5. 8. · The new model...

The Bank of Thailand’s Practical Model-BasedForecasting and Policy Analysis System

Tosapol Apaitan and Surach Tanboon

Bank of Thailand

February 24, 2012

Apaitan and Tanboon (Bank of Thailand) Practical Model-Based FPAS February 24, 2012 1 / 21

The new model is currently being developed by the staff of the Bankof Thailand’s Monetary Policy Group with the technical assistanceprovided by the Economic Modeling Unit of the IMF ResearchDepartment.

The views expressed in this paper are those of the authors and do notnecessarily represent the Bank of Thailand’s policies or the views ofthe IMF.


1. Overview

Objective

A suite of economic models

Primary focuses of new model

Economic projectionMonetary policy formulation

Key features of model

Transmission mechanism and various pass-throughsInflation and output stabilizationEndogenous interest rate projection


Outline of presentation

1 Describing the model structure

Semistructural New Keynesian model

2 Examining model properties3 Evaluating the model4 Applying the model

Macroeconomic projectionMonetary policy formulation


2. Model specification2.1. Model structure

Modeling philosophy

Monetary policy stabilizes inflation and output by managing businesscycles

Business cycles are transitory in that they are independent of, and donot affect, the long-term trends in the economy


Inflation

Inflation expectations are influenced by future and past inflation

Inflation eventually converges to expected inflationChanges in inflation persist only if inflation expectations change

Excess demand puts upward pressure on core inflation via output gap

Exchange rate directly and indirectly passes through to core inflation

Higher food and energy prices ratchet up underlying inflation

πt = θπf πt+1 + (1− θπf )πt−1 + αy ŷt+αM

(πMt − dz̄t − πHss

)+ αz (zt − z̄t )

+αF(

πFt − πFss)+ αE

(πEt − πEss

)+ επt


Output

Output gap is based on the view that forward-looking economicagents adjust their current spending to reflect expected income

Monetary policy affects output gap through real interest rate and realexchange rate gaps

An increase in foreign excess demand also creates additional demandfor domestic goods

ŷt = θyf ŷt+1 + θ

yb ŷt−1 − β

r (rt − r̄t ) + βz (zt − z̄t ) + βy∗ŷ ∗t + εyt


Exchange rate

For the exchange rate to be stable:

Domestic interest rate must equal foreign rate plus country risk

Current account must be balanced

Domestic inflation must equal foreign inflation

st = ρs[st−1 +

14

(dz̄t − π∗t + πHt

)]+ (1− ρs )

[st+1 −

14(it − i∗t − µ)− χΛt

]+ εst


Interest rate

Central bank gradually moves policy rate around its trend in response to

Deviations of output from trend

Deviations of inflation from target

it = ρi it−1 +(1− ρi

) [r̄t + πHss + φ

y ŷt + φπ(π4t+3 − πtarget

)]+ εit


2. Model specification2.2. Model parameterization

Calibration of model parameters must yield

Inherent instability

If the policy rule is turned off, the model gives no unique solutionIf the model is inherently stable, simulation/projection will converge tosteady state even without monetary policy

Sensible impulse responses


Inherent instabilitywith the interest rate rule turned off

The economy in the green region will stabilize itself even without monetarypolicy’s role


Region of determinacyfor a nonforward-looking interest rate rule

Source: Gali (2008), Monetary Policy, Inflation, and Business Cycle


Region of determinacyfor a forward-looking interest rate rule

Source: Gali (2008), Monetary Policy, Inflation, and Business

CycleApaitan and Tanboon (Bank of Thailand) Practical Model-Based FPAS February 24, 2012 13 / 21

Region of determinacyfor an interest rate rule in Apaitan and Tanboon (2012)


Important impulse response functions

See Handout 1

Interest rate shock

Demand shock

Inflation shock

Exchange rate shock

Foreign demand shock


24-Feb-2012 16:25:35 SSM Speci�cation 8

3.2 Demand shx

CPI (%QoQ)

0 10 200

0.1

0.2

0.3

0.4

Core CPI (%QoQ)

0 10 200

0.2

0.4

CPI Index

0 10 200

0.2

0.4

0.6

Core CPI Index

0 10 200

0.2

0.4

0.6

CPI (%YoY)

0 10 200

0.1

0.2

0.3

Core CPI (%YoY)

0 10 200

0.1

0.2

0.3

0.4

Nominal ER depreciation (%)

0 10 20

−0.4

−0.2

0

0.2

0.4Real ER depreciation (%)

0 10 20

−0.8

−0.6

−0.4

−0.2

0

Output gap (%)

0 10 20

0

0.5

1Current account (%−GDP)

0 10 20

−0.2

−0.15

−0.1

−0.05

0Nominal exchange rate

0 10 20

0

0.2

0.4

0.6

Real exchange rate

0 10 20−0.3

−0.2

−0.1

0

Nominal interest rate (%)

0 10 200

0.1

0.2

0.3

0.4

Real interest rate (%)

0 10 20

−0.1

0

0.1

0.2Demand shx

0 10 200

0.5

1

24-Feb-2012 16:25:35 SSM Speci�cation 9

3.3 Core in� shx

CPI (%QoQ)

0 10 200

0.2

0.4

0.6

0.8

Core CPI (%QoQ)

0 10 200

0.5

1

CPI Index

0 10 200

0.5

1

Core CPI Index

0 10 200

0.5

1

1.5

CPI (%YoY)

0 10 200

0.2

0.4

0.6

0.8Core CPI (%YoY)

0 10 200

0.5

1

Nominal ER depreciation (%)

0 10 20

−0.5

0

0.5

Real ER depreciation (%)

0 10 20−1.5

−1

−0.5

0

Output gap (%)

0 10 20

−0.2

−0.15

−0.1

−0.05

0

Current account (%−GDP)

0 10 20

−0.2

−0.1

0Nominal exchange rate

0 10 20

0

0.5

1

Real exchange rate

0 10 20

−0.4

−0.2

0

Nominal interest rate (%)

0 10 200

0.2

0.4

0.6

0.8

Real interest rate (%)

0 10 20−0.4

−0.2

0

0.2

Core infl shx

0 10 200

0.5

1

3. Model evaluation

Recursive forecasts and RMSEs

Output

Inflation

Interest rate


20-Feb-2012 15:49:21 SSM Evaluation 3

1 Output Growth

Output Growth (%YoY)

2002:1 2004:1 2006:1 2008:1 2010:1 2012:1

−6

−4

−2

0

2

4

6

8

10

12

RMSE

n=0 n=1 n=2 n=3 n=4 n=5 n=6 n=7 n=8

0.57 2.02 2.98 3.47 3.95 4.14 4.29 4.40 4.48


2 Core In�ation

Core Inflation (%YoY)

2002:1 2004:1 2006:1 2008:1 2010:1 2012:1

−2

−1

0

1

2

3

4

5

RMSE

n=0 n=1 n=2 n=3 n=4 n=5 n=6 n=7 n=8

0.07 0.36 0.64 0.97 1.40 1.61 1.85 1.93 1.94


4 Interest Rate

Interest Rate

2002:1 2004:1 2006:1 2008:1 2010:1 2012:1

0

1

2

3

4

5

6

RMSE

n=0 n=1 n=2 n=3 n=4 n=5 n=6 n=7 n=8

0.16 0.68 0.72 0.99 1.21 1.37 1.48 1.64 1.81

4. Model application4.1.Economic projection

See Handout 2: Baseline projection as of February 2012

Output

Inflation

Interest rate


24-Feb-2012 15:29:37 DSGE Forecast: Baseline 3

1 Output Growth

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4

%YoYCurrent Projection 3.17 2.73 3.72 −8.98 −3.01 1.44 3.02 17.59 9.75 6.10 4.87 4.74Outturn 3.17 2.73 3.72 −8.98 · · · · · · · · · · · · · · · · · · · · · · · ·%QoQ, not annualizedCurrent Projection 1.50 −0.49 0.85 −10.71 8.10 4.63 2.31 1.25 1.25 1.15 1.13 1.13Outturn 1.50 −0.49 0.85 −10.71 · · · · · · · · · · · · · · · · · · · · · · · ·

Output Growth (%YoY)

2008:2 2009:2 2010:2 2011:2 2012:2 2013:2

−5

0

5

10

15

Current ProjectionOutturn

Output Growth (%QoQ, not annualized)

2008:2 2009:2 2010:2 2011:2 2012:2 2013:2

−10

−8

−6

−4

−2

0

2

4

6

8



3 Core In�ation

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4

%YoYCurrent Projection 1.46 2.37 2.79 2.82 2.79 2.33 2.11 1.94 1.47 1.12 1.26 1.41Outturn 1.46 2.37 2.79 2.82 · · · · · · · · · · · · · · · · · · · · · · · ·%QoQ, not annualizedCurrent Projection 0.79 1.13 0.46 0.42 0.75 0.68 0.24 0.26 0.29 0.33 0.37 0.41Outturn 0.79 1.13 0.46 0.42 · · · · · · · · · · · · · · · · · · · · · · · ·

Core Inflation (%YoY)

2008:2 2009:2 2010:2 2011:2 2012:2 2013:2

0

0.5

1

1.5

2

2.5

Current ProjectionOutturnLong run

Core Inflation (%QoQ, not annualized)

2008:2 2009:2 2010:2 2011:2 2012:2 2013:2

−0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Current ProjectionOutturnLong run


7 Policy Interest Rate

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4

Current Projection 2.29 2.79 3.33 3.42 3.05 2.99 3.01 3.02 3.07 3.15 3.26 3.37Outturn 2.29 2.79 3.33 3.42 · · · · · · · · · · · · · · · · · · · · · · · ·

Interest rate (%)

2008:2 2009:2 2010:2 2011:2 2012:2 2013:2

1.5

2

2.5

3

3.5


4. Model application4.2. Monetary policy analysis

4.2.1. Effects of floods on output and potential output

Although output significantly contracted in 2011Q4, potential outputalso declined

See Handout 3 for scenario analysis with and without changes inpotential output


App1: Effects of floods on output and potential output

• Baseline

• Potential output

unaffected

2


• Baseline


unaffected

3


• Baseline


unaffected

4


4.2.2. VAT increase and monetary policy relevant inflation

Part of inflation caused by VAT increase is disregarded monetarypolicy

See Handout 3Apaitan and Tanboon (Bank of Thailand) Practical Model-Based FPAS February 24, 2012 19 / 21

TosapolATypewritten Text* MP-relevant inflation =Observed inflation (1st-rnd + 2nd-rnd)- 1st-rnd inflation

TosapolATypewritten Text

App2: Monetary policy relevant inflation

• Targeting actual inflation

• Targeting policy relevant inflation

5


4.2.3. Interest rate path scenarios

1 Endogenous interest ratepath

2 Endogenous interest ratepath with judgmentadded at the start of theforecast period

See Handout 3


App3: Interest rate path scenarios

• Baseline • Alternative

6

Conclusions

“All models are wrong, some are useful”

“The model does not forecast, economists do”


1. Overview2. Model specification 2.1. Model structure 2.2. Parameterization

3. Model evaluation4. Model application4.1. Economic projection4.2. Monetary policy analysis

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