MONFISPOL

Modeling and Implementation of Optimal Fiscal and Monetary Policy Algorithms in Multi-Country Econometric Models

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 Obiettivo del progetto (Objective)

'This project contributes to the evaluation of macroeconomic policy by advancing the analysis of optimal fiscal and monetary policy in monetary union such as the European one. This work will result in the addition of new numerical tools, specially designed for the computation of optimal policy in large macro-econometric models. Such multi-country models are necessary to take into account the diversity of the countries making now the European Union. These new tools for the computation of optimal policy will be added to DYNARE, a public domain platform for the simulation and estimation of dynamic stochastic general equilibrium models (DSGE), that is increasingly used in policy making institution and in academic research alike. New models are proposed to analyze the contribution of optimal policy to smooth shocks in a union of heterogeneous countries with rigidities in labor and financial markets. In that framework, special attention is given to the dynamics of public debt. Systematic models comparison is made possible thanks to a database of macroeconomic models currently in use in policy making institutions around the world. New numerical tools are added to DYNARE that provide the computation of optimal policy, either under commitment, in a timeless perspective or under discretion, for a general class of nonlinear models. Particular attention is given to correct linear quadratic approximation of these models. Extensions are proposed to deal with partial information. These tools shall also permit to perform Bayesian estimation of models under the assumption that the policies followed were optimal. Special emphasis is placed on the definition of priors. Given the complexity of the numerical computations, we stress speed of computation and the development of parallel algorithms. Altogether, this project should represent a very significant step forward towards better models and better tools for the formulation of macroeconomic policies.'

Introduzione (Teaser)

Sophisticated modelling techniques and tools have now been developed to help policymakers create better fiscal policies and stabilise the economy.

Descrizione progetto (Article)

With the economic crisis affecting practically all corners of the world, the EU is seeking high-tech ways to strengthen its fiscal policy and enhance financial stability. The overarching goal of the EU-funded project MONFISPOL is to develop powerful modelling scenarios that could assess macroeconomic policy in unique situations particularly in monetary unions such as the EU.

Project partners worked on novel numerical tools and computational algorithms to further academic research in the field of fiscal and monetary policy, as well as to assist policymaking. It investigated how good fiscal policy can smooth shocks in the EU, where many countries suffer from high financial debt, taking into account the different labour and financial markets involved.

To develop its models, the project team analysed the international transmission of shocks and studied different exchange rate arrangements with respect to macroeconomic volatility and stability. It identified the assets required to help governments smooth the shocks they encounter. In addition, the team analysed economies where consumption was financed through foreign lending, underlining the limitations of inflation-related strategies for industrialised countries.

Armed with its new findings and results, the project developed analytical and computing tools for simulating and estimating models under optimal policy. Other activities involved a systematic review of related literature and the preparation of a database of macroeconomic models used in policymaking institutions worldwide. MONFISPOL then developed specific macroeconomic models that could help policymakers reach optimal decisions regarding fiscal or monetary policy.

These newly generated models shed light on the impact of frictions in the labour market, post-crisis fiscal and monetary accommodation, optimal debt management, economic stabilisation policies and macroeconomic analysis. The team produced a database with 30 different economic models, which were made available online and could provide excellent support for policymakers.

Models and tools produced by MONFISPOL represent a solid step forward in producing better macroeconomic policies and stabilising Europe's economy during the economic crisis.