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A Projection Model for Resource-rich and Dollarized Economy: The Democratic Republic of the Congo
The paper introduces a semi-structural Quarterly Projection Model (QPM) tailored for the Democratic Republic of the Congo (DRC), highlighting its resource richness and high degree of dollarization. We provide an overview of the model's specifications to elucidate key features of the DRC economy and present its properties, evaluating its alignment with DRC data and assessing its goodness of fit. Additionally, the paper demonstrates the QPM's practical application through a counterfactual scenario, comparing policy recommendations with the actual policy responses of the Central Bank of the Republic of Congo to observed exchange rate and inflation pressures in 2023. Beyond the QPM, the paper showcases supplementary tools that enhance its utility for generating medium-term forecasts and developiong narratives in support of monetary policymaking. Specifically, we introduce the Nowcasting and Near-Term Forecast models, designed to assess the economy in real-time and predict short-term inflationary trends.
Fix Vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia
Bolivia has achieved noteworthy success over the past 15 years in raising incomes, reducing poverty, and maintaining macroeconomic stability by deploying commodity revenues to finance transfers, public investment, and state-led development, using an exchange rate peg as a policy anchor. However, with the end of the commodity boom in 2014, fiscal deficits have grown and reserves have fallen. One route to restoring long-run sustainability would be to combine fiscal consolidation with a switch to a floating exchange rate. However, a preference for maintaining the peg could be accommodated with adjustments elsewhere in the policy framework. Employing a detailed dynamic stochastic general equilibrium model of the Bolivian economy, this study assesses the long-run sustainability and relative benefits of alternative policy combinations, and calculates optimal adjustment paths for the transition from the present situation to the steady state. It concludes that continued adherence to a fixed-rate regime, while not optimal, is feasible, if supported by a larger fiscal effort.
FINEX - A New Workhorse Model for Macroeconomic Forecasting and Policy Analysis
This paper presents a semi-structural macroeconomic model aimed at facilitating policy analysis and forecasting, primarily in countries with imperfect capital mobility and hybrid monetary policy regimes. Compared to earlier gap-trend projection models, the Forecasting Model of Internal and External Balance (FINEX) contains three main innovations: it accentuates external and internal balances; explicitly incorporates fiscal policy; and partly endogenizes the main trends. FINEX thus covers a broad set of policy instruments, including foreign exchange interventions (FXI), capital flow management measures (CFM), as well as common fiscal policy instruments. The model incorporates insights from the recent DSGE literature, while maintaining a more accessible gap-trend structure that lends itself to practical policy applications. While the paper refrains from drawing broad policy lessons, it emphasizes the model's ability to interpret recent data in terms of structural shocks and policy responses, thereby aiding policymakers in constructing coherent economic narratives and considering alternative scenarios.
Integrated Policy Framework—Principles for the Use of Foreign Exchange Intervention
This note guides policy advice on the use of foreign exchange intervention (FXI) as part of the Integrated Policy Framework (IPF) in Fund surveillance. The note provides general principles for the advice in countries with flexible exchange rates and sets out three use cases for FXI that are tied to specific frictions. It explores the use of FXI as part of an overall policy response, allowing the advice to differ with shocks, frictions, and country-specific circumstances.
What Shapes Current Account Adjustment During Recessions?
This paper studies the dynamics of external accounts during 278 economic recession events in the past 60 years and sheds light on key factors that shape these patterns. Economic recessions trigger highly-persistent increases in the current account, driven by an initial, sharp decline in investment and fueled by medium term deleveraging, more so in advanced economies than in emerging markets. The strengthening of the current account is more pronounced when internal and external imbalances are present, and less when recessions are synchronized across countries. During severe natural disasters or epidemics, however, current accounts tend to weaken in the short term. Consistent with these findings, the COVID-19 shock, with comparatively moderate pre-existing imbalances yet high synchronization, had a muted effect on current account balances. The compositional changes, however, were unique and driven by unprecedented policy intervention, with record public dissaving more than offsetting exceptional private saving.
Estimating Fiscal Multipliers Under Alternative Exchange Rate Regimes: The Case of Bolivia
Empirical (employing the Blanchard-Perotti framework) and modeling (using a country-specific DSGE model) approaches are used to estimate fiscal multipliers by policy instrument for Bolivia, to evaluate possible adjustments in a fiscal consolidation strategy. Multipliers are also estimated using alternative assumptions about the accompanying exchange rate regime and capital mobility, highlighting the importance of the policy mix in determining the impact of fiscal adjustments. The study exploits the DSGE modeling structure to assess this interaction of fiscal and monetary policy in a lower middle-income country under different exchange rate regimes. It finds that expenditure multipliers fall into the range of 1/3 to 2/3, with public investment multipliers slightly higher than government consumption multipliers over longer horizons, and multipliers generally higher under a peg than inflation targeting. Tax multipliers are shown to be about half of expenditure multipliers.
