SIGMA: a new open economy model for policy analysis

By C. Erceg, Luca Guerrieri, Christopher J. Gust. 2005

405 citations recorded by the source corpus.

In this paper, we describe a new multicountry open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in policy simulations. We show that SIGMA's implications for the near-term responses of key variables are generally similar to those of FRB/Global. Nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/0000c5f7f7685f8efa114dfd809e547880d00172

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In Economics and Econometrics

1. M. Pisani
2. Eric M. Leeper
3. Guenter Coenen
4. Gernot J. Müller
5. Michael T. Kiley
6. V. Ramey
7. John Barrdear
8. Roland Straub

Citations in the corpus

• A Microfounded Sectoral Model for Open Economies (2007, methodology): “The calibration used by Erceg et al. (2005) assumes an annualized interest rate of 3%, a risk aversion parameter of 2, a habit formation parameter θ = 0.7 but measured in the form Ct − θCt−1, the Frisch elasticity of labor of 1/5.”
• Expansionary Fiscal Shocks and the US Trade Deficit (2005, background): “In a recent working paper, Erceg et al. (2005) found that a reduction in the capital income tax rate equal to one percentage point of GDP induced a trade balance deterioration of nearly 0.25 percentage point of GDP.”
• Clearing Up the Fiscal Multiplier Morass (2011, methodology): “…in modeling wage-setting decisions exists in the literature.2 We follow the approach of assuming savers optimally set their wage while non-savers simply set their wage to be the average wage of the savers [examples include Erceg, Guerrieri, and Gust (2006) and Forni, Monteforte, and Sessa (2009)].”
• An Estimated DSGE Model for the German Economy within the Euro Area (2005, background): “The following equations are the first order conditions (FOC) for the consumer optimization problem: 1 Rt = βEt " εt+1(Ct − κCt−1) εt (Ct+1 − κCt)πC,t+1 # (26)”
• Fiscal consolidation in the euro area: long-run benefits and short-run costs (2008, neutral): “Pesenti, 2004) or the Federal Reserve Board’s new open economy model named SIGMA (cf. Erceg, Guerrieri and Gust, 2005 ).”
• Foreign effects of higher U.S. interest rates (2019, background): “For instance, Frankel and Saravelos (2012) suggest that central bank reserves are one of the leading indicators in explaining crisis incidence across different countries. Lane and Milesi-Ferretti (2017) indicate that excessive reliance on debt finance may increase a country’s actual and perceived vu”
• The shocks matter: Improving our estimates of exchange rate pass-through (2018, positive): “This avoids one of the critiques often mentioned with regards to the long-run restriction methodology, see Erceg et al. (2005).”
• MACROECONOMIC EFFECTS OF GREATER COMPETITION IN THE SERVICE SECTOR: THE CASE OF ITALY (2010, neutral): “[14] Erceg, C.”
• Natural rate measures in an estimated DSGE model of the U.S. economy (2008, neutral): “Both the IMF’s GEM (IMF [2004]) and the SIGMA model (Erceg et al. [2005]) used in the Federal Reserve’s Division of International Finance have been employed as storytelling vehicles.”
• A comparison of forecast performance between federal reserve staff forecasts, simple reduced‐form models, and a DSGE model (2010, background): “, Erceg et al. [2006]) have provided examples of richly-specified models with firm microeconomic foundations that can be applied to policy questions.”
• Can Structural Reforms Help Europe (2013, neutral): “Finally, as in Erceg et al. (2006), the intermediation cost ψBt ensures stationarity of the net foreign asset position ψBt ≡ exp [ −ψB ( nBt PtYt )] , (36) where ψB > 0 and PtYt corresponds to nominal GDP PtYt ≡ PHtYHt + PNtYNt.”
• Opting Out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods (2009, neutral): “Relevant references are Smets and Wouters (2003, 2007), Coenen et al. (2008), Christiano et al. (2008) Erceg et al. (2006), Edge, et al. (2007) and Bayoumi et al. (2004).”