Narrow Results

Given the economy's complex behavior and sudden transitions as evidenced in the 2007–2008 crisis, agent-based models are widely considered a promising alternative to current macroeconomic research dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy's financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces "flow-of-funds" or "accounting" models, which were pre eminent in successful anticipations of the recent crisis. In illustration, a simple balance sheet model of the economy is developed to demonstrate that non-linear behavior and sudden transition may arise from the economy's balance sheet structure, even without any micro-foundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research.

A New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with habit persistence used to examine the US slowdown is also used to analyze the contribution of basic demand and supply shocks to the Indian slowdown. Kalman filter-based maximum likelihood estimation is undertaken with Indian output, inflation and interest rate data. First, our model based output gap tracks the statistical Hodrick–Prescott filter-based output gap well. Second, comparison of estimated parameters, impulse responses and forecast error variance decomposition between India and the US brings out the differences in policy responses, the structure of the two economies and their inflationary processes. There is a higher impact of interest rate shocks on output and inflation, and lower impact of technology shocks on output but higher on inflation in comparison to US. The former indicates monetary policy over-reaction and the latter validates a supply curve that technology shocks shift and inadequate adjustment of actual to potential output. Habit persistence is higher, markup and interest rate shocks are more volatile in India. Markup shocks play a much larger role in determination of Indian inflation again pointing to the importance of supply side factors. Third, smoothed states obtained from the Kalman filter to create counterfactual paths of output and inflation (during 2009:Q4 to 2013:Q2) in the presence of a given shock, show monetary shocks imposed significant output cost. The output gap was negative post the 2011 slowdown and in 2016.

In this paper, we study whether the implementation of unconventional monetary policy (UMP) in Japan is relevant to its economy fluctuations. We conducted a Bayesian estimation of a DSGE model with an endogenous financial intermediary, and the central bank in the model is allowed to conduct a credit policy. Our findings can be summarized in the following three points: first, we find that the estimated posterior distribution of model parameters and the impulse response provide a plausible interpretation of the data. Second, by shock decomposition, we find that the credit supply shock of the bank sector played a crucial role in the GDP and investment fluctuations in the sample period. Third, the estimated risk spread reveals a high degree of correlation to the actual credit spread in Japan. Our estimation results suggest that UMP in Japan is effective in the sense of narrowing credit spreads, which leads to subsequent increase in investment and, in turn, positively affects the economy.

Given the increasing economic ties between African countries and China, this study investigates the effects of China’s output and monetary policy shocks on African countries’ macroeconomic performance for the period 1995q1 to 2021q4. The study formulates and estimates a dynamic stochastic general equilibrium (DSGE) model with the Bayesian technique. The results show that China’s output and monetary policy shocks impact African countries’ macroeconomic performance. The findings indicate that China’s output and monetary policy shocks affect output, inflation and exchange rates in African economies through the trade and financial channels. However, the results show that China’s output shocks have greater impacts on output and inflation while China’s monetary policy shocks have stronger impacts on exchange rate in African countries. The study recommends that African countries should deepen their intra-regional trade, promote economic diversification and monitor China’s business cycles and policies so as to reduce their vulnerabilities to China’s macroeconomic shocks.