Macroeconomic Model Spillovers and Their Discontents

26 Pages Posted: 28 Feb 2013

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Francis Vitek

International Monetary Fund (IMF)

Date Written: January 2013

Abstract

The Great Recession underlined that policies in some countries can have profound spillovers elsewhere. Sadly, the solution of simulating large macroeconomic models to measure these spillovers has been found wanting. Typical models generate lower international correlations of output and financial asset prices than are seen in even pre-crisis data. Imposing higher financial market correlations creates more reasonable cross-country spillovers, and is likely to become the norm in policy modeling despite weak theoretical underpinnings, as is already true of sticky wages. We propose using event studies to calibrate market reactions to particular policy announcements, and report results for U.S. monetary and fiscal policy announcements in 2009 and 2010 that are plausible and event-specific.

Keywords: Cross country analysis, Economic models, Growth spillovers, Spillovers, bond, bond market, bond markets, bond returns, bond yields, domestic bond, equity market, equity markets, financial market, financial markets, financial structure, foreign bond, foreign equity, global bond, international bond, international bond market, international financial links, international financial markets, macroeconomic models, money market, money market interest, money market interest rates, money markets, spillovers, yields on bond

JEL Classification: E44, F42, F47, G15

Suggested Citation

Bayoumi, Tamim and Vitek, Francis, Macroeconomic Model Spillovers and Their Discontents (January 2013). IMF Working Paper No. 13/4. Available at SSRN: https://ssrn.com/abstract=2226277

Tamim Bayoumi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francis Vitek

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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