Macroeconometric Modeling in Small Open Resource Rich Economies
Open AccessThis dissertation investigates the traditional empirical determinants and possible unique empirical characteristics in the monetary and external sectors of small open resource rich economies. The first chapter investigates the external sector as it relates to imports and the potential role for monetary policy. The second chapter jointly investigates the monetary and external sectors regarding monetary exchange rate policy and its implications. The third chapter investigates the monetary sector concerning monetary policy operating procedures and the macroeconomic effects of systematic monetary policy. The first chapter examines liquidity effects on the demand for imports of non-durable consumers’ goods in Trinidad and Tobago (TT). A parsimonious vector equilibrium correction model (VEqCM) is developed to test the hypotheses that liquidity has both long- and short-run effects. Cointegration analysis reveals a long-run relation among consumers’ imports, output, liquidity and relative prices. General-to-specific (Gets) modeling via Autometrics reveals significant short-run liquidity and asymmetric foreign and domestic price effects. The VEqCM is congruent with the underlying data generation process, demonstrates desirable statistical properties and empirically constant parameters, parameter encompasses previous specifications and generates reliable forecasts. The second chapter presents an approach for empirically estimating long-run monetary policy rules in small open economies. The approach utilizes the cointegrated VAR methodology, statistical tests on long- and short-run relations, and investigations of policy responses to deviations from desired macroeconomic target levels. An application is presented for TT. The analysis reveals an empirically supported long-run monetary policy rule for the nominal exchange rate, and also provides empirical evidence that oil price shocks are transmitted through the TT economy in part via the effects on US prices. Dynamic specification of the nominal exchange rate reveals significant adjustment towards the target equilibrium, and significant effects from foreign and domestic variables save for the exchange rate. The parsimonious specification and its parameter estimates are empirically constant and generate reliable forecasts that yield important implications for estimated policy rules. The third chapter examines the extent to which the Dutch Disease effects are brought on by the monetary policy responses to energy sector economic activity. The cointegrated VAR methodology and impulse response analysis are utilized. Analysis of the TT economy reveals both the long-run and short-run energy and non-energy income elasticities of inflation are asymmetric; monetary policy and its targets respond asymmetrically to energy and non-energy income shocks; and systematic policy responses to energy and non-energy income shocks are asymmetric, where responses to the former make worse the Dutch Disease. Policy implications suggest that macroeconomic policy based on empirical models relying solely on aggregate measures of economic activity may lack congruence and therefore may not yield valid or useful policy inferences, particularly for economies with enclave economic sectors.
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