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By Bilal Hafeez 25-03-2020
In: post | Newsletter

Macro Hive: COVID Update + Deep Dive On Central Banks’ Favourite Economic Model

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(total reading time: 3 mins)

We focus in on the surprisingly low cases in Japan for our COVID tracker today. Despite having one of the world’s oldest populations it has recorded fewer cases than Czech Republic or Australia who have much smaller population and, of course, are further from China. With schools set to re-open testing may be stepped up and a surge in new cases is very possible.

For our Deep Dives today we focus on a key element of every central bank toolkit, the DSGE model. With central banks currently recalibrating their models to try to estimate the size of the shock from the coronavirus a recap on the limitations and extensions of these models seems particularly timely. We also incorporate the findings of a NY Fed paper looking at how these models performed during the financial crisis. 

Enjoy!

Bilal


Hive Indicators

Coronavirus COVID-19

Global COVID-19 Tracker: What is Going on in Japan?

• One of the puzzles during this COVID era has been Japan. It has one of the oldest populations in the world and is next to China, yet it has only reported 1,200 cases of COVID. That’s less than Australia or the Czech Republic.

• Compared to other industrialised Asia-pac countries, Japan is at lowest levels whether one looks cumulatively or in recent daily changes (see first two charts).

• Only Taiwan is comparable. But Taiwan has been extremely pro-active in terms of its suppression strategy whether limiting travellers from China early on and extensive tracking and testing.

 

Demystifying the DSGE Model (7 min read) DSGE models were bashed during the Great Recession for their inability to foresee the crisis. Yet, they are still central banks’ go-to macroeconomic tool to predict business cycle fluctuations, perform policy analysis, and communicate monetary policy expectations. Despite their negative press and widespread use, these models remain less well-known outside the macro circle. Here, in Part 1, we demystify the DSGE Model. In Part 2, we cover its limitations and introduce extensions of DSGE models.

DSGE Model

Finally, we will also analyse the forecasting performance of some of these models during the turbulent times of 2008 using the New York Fed working paper, DSGE Model-Based Forecasting.

(Mehdi Farooq │ 25th March, 2020)

 

 

 

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)