DSGE Models

'The Effects of Government Spending 
in a Small Open Economy within a Monetary Union'

by Daragh Clancy, Pascal Jacquinot and Matija Lozej - ECB Working Paper (No. 1727)

The European Central Bank (ECB) developed the EAGLE, a large scale multi-country model, to examine issues of euro area interdependencies. The model features four blocs, two of which are part of a monetary union. The “home” bloc in the original model was calibrated to Germany. Ten member states have thus far recalibrated the model to be useful for policy analysis.

As part of this process, Daragh Clancy spent three months on secondment at the ECB recalibrating the model to Ireland. This collaboration with ESCB colleagues continued when Daragh was part of a team that developed a fiscal extension of the original model. The fiscal extension allows government expenditure to enter households utility function and government investment increases public capital, which enters the production function. These features allow to generate co-movement between public and private consumption and public and private investment. In this work the size of fiscal multipliers for Ireland is calculated.

Work on this component of the project has been presented at seminars in the CBI, ECB and University of Ljubljana, as well as at the 20th International Conference for Computing in Economics and Finance (Oslo).

An ECB Working Paper (No. 1727) has been further developed and submitted for publication at an academic journal.  

'EIRE Mod- A DSGE Model for Ireland' 

by Daragh Clancy and Rossana Merola - Central Bank of Ireland Technical Paper 11/RT/14

In the bottom-up approach a core model of the Irish economy was developed. The model has neo-Keynesian features and is calibrated in order to match key observed ratios in the Irish data. Some specific features of Ireland, such as the degree of openness, the high import content of exports, and Irish membership in the European Monetary Union are also included  in the core model.

The core model, named EIREmod, is currently described in detail in the Central Bank of Ireland Research Technical Paper No. 11.

The Dynare code for the model are available, quoting the source working paper.

The Dynare code can be downloaded here

The Central Bank of Ireland Research Technical Paper No. 11 examines the impact of various structural reforms on the Irish economy.

The core model is currently being estimated using Bayesian techniques.

EIREmod is intended as a first step towards a set of more detailed DSGE models for Ireland, therefore it has been and will be the basis for a set of extensions. These extensions will be add-ons to the model, thus allowing a more detailed treatment of themes and questions of interest the policy maker.

An extended model including a financial sector is ongoing work (see next articles for further details). A more detailed analysis of the fiscal sector and of labour market is also on the modelling agenda.

 

'The effect of macroprudential policy 
on endogenous credit cycles',
Daragh Clancy and Rossana Merola, Central Bank of Ireland Research Technical Papers 15/RT/14

An extended model including a financial sector is developped. Specifically, we enhance EIRE Mod, a DSGE model of the Irish real economy, with the inclusion of a financial sector. This extension allows us to examine macro-financial feedback loops through the lens of the housing market.

We find that the model is capable of replicating some key stylised facts from the bursting of the Irish property bubble. We show that expectations of future favourable events may accelerate credit growth and potentially result in a more vulnerable economy susceptible to downward revisions to the original expectations.

The model is specifically designed to analyse the effect of macroprudential policy, with the focus on banks capital requirements and the newly implemented counter-cyclical capital buffer. We find that time-varying capital buffers are particularly effective in insulating the economy from these risks. Adjusting the minimum capital requirement in response to the financial cycles can encourage banks to develop capital buffers during periods of economic expansion. Reducing these during downturns can enable banks to play a role in economic recovery.