Currently the Centre for International Macroeconomic Studies is working on the following projects:
The broad modelling strategy is to develop and estimate a new DSGE model that is suitable for the study of fiscal alongside monetary policy. The fiscal dimension, the centrepiece of the project, requires new transmission mechanisms that were absent in the earlier generation DSGE models, such as “deep habit’’, and proper attention to the fiscal consequences of unemployment.
The aim of this research is to first, systematically assess the empirical support for the existence of financial frictions that restrict the availability of credit in household-bank, bank-bank and bank-firm relationships. As in the fiscal project, these features will be embedded in a medium size New Keynesian model estimated by Bayesian methods.
The institutional mandates between monetary policy and banking supervision remain an open-ended
question in academic literature. There appear to be strong arguments for and against separation of policies and the major challenge is to find clear-cut a theoretical answer to the question of what would be the most efficient institutional mandate concerning social welfare.
This project grew out of a three-year collaboration, September 2008 – September 2011 financially supported by the Foreign Common-Wealth Office and led by Ila Patnaik and Ajay Shah of the National Institute for Public Finance Policy (NIPFP), New Delhi. That project developed an estimated closed-economy DSGE model of the Indian economy, with particular attention paid to incorporating features relevant to the Indian economy such as informality and financial frictions. In this way we are contributing to as yet a small subset of the DSGE modelling literature that focuses on emerging economies.
This theme was supported by a three-year project from September 2008, financed by the Framework Programme 7 of the European Commission. The final aim was to add the two facilities to the macroeconomic modelling software package DYNARE, pioneered by Michel Juillard. First, to extend the scope of DYNARE to handle imperfect information in the estimation of DSGE models. Second, to provide a facility in both perfect and imperfect settings to compute optimal monetary rules where policy is constrained in a number of ways including the need for simplicity, time consistency and robustness.
Most macroeconomic models, especially models of economic fluctuations, ignore the role of capital-labour substitution and non-neutral technical change for macroeconomic outcomes such as employment, output, and inflation. Despite being an established issue in growth theory, almost no effort has been devoted to consider the role of the elasticity of capital-labour substitution (ES) in macroeconomic models of the business cycle. However, they are of crucial importance because they determine changes in the distribution of income between capital and labour, unemployment dynamics, the effect of technology shocks, and can influence optimal decisions in monetary and fiscal policies. Our project, hence, aims at filling this important gap in the literature and our understanding of macroeconomic dynamics.
Traditional DSGE modelling has been criticised for over-reliance on the assumption of the existence of a representative agent with costless access to perfect information, unlimited information processing capacities and costless computation. In fact, all of these assumptions are widely challenged in the theoretical, but technical challenges have prevented many of the innovations of these papers from entering medium-scale DSGE models. The objective of this research is to begin to address these technical challenges and to build a medium-scale DSGE model with heterogeneous agents, partial information, limited information capacities (rational inattention) and computation and information costs.
This project offers a number of innovations that can help shaping policy decisions at a macro level and, thus, with the potential for high impact on welfare. Thus, the broad aim is to deepen our understanding of the interactions between financial development, R&D, absorptive capacities and productivity and to arrive at prescriptions in the form of more effective monetary, fiscal, financial and competition policies for promoting growth. For that effect, we propose to embed endogenous growth into a series of DSGE model, in order to produce an environment in which we can assess the impact of macroeconomic, financial and industrial policies on the rates of R&D-led growth and of technology diffusion in advanced and emerging economies respectively.