Sigma: A New Open Economy Model for Policy Analysis

IFDP Discussion Paper No. 835

IFDP Discussion Paper No. 835

53 Pages Posted: 17 Aug 2005

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies

Date Written: July 2005

Abstract

In this paper, we describe a new multi-country 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 open-economy policy simulations. We show that SIGMA's implications for the near-term (2-3 year) responses of key variables are generally similar to those of FRB/Global. Two features of our modeling framework, including rational expectations with learning, and the inclusion of some non-Ricardian agents, play an important role in giving SIGMA more flexibility to generate responses akin to the econometric policy model; 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. These include linking model responses to underlying structural features of the economy, and fully articulating the endogenous channels through which imbalances arising from various shocks are alleviated.

Keywords: SDGE model, open-economy macroeconomics

JEL Classification: E32, F41

Suggested Citation

Erceg, Christopher J. and Guerrieri, Luca and Gust, Christopher J., Sigma: A New Open Economy Model for Policy Analysis (July 2005). Board of Governors of the Federal Reserve System Research Paper Series; IFDP Discussion Paper No. 835. Available at SSRN: https://ssrn.com/abstract=781404 or http://dx.doi.org/10.2139/ssrn.781404

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Christopher J. Gust

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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