1

NECMODPresentation of the new

forecasting model

NBP, Warsaw, 30th June 2008

Katarzyna Budnik, Michał Greszta, Michał Hulej, Marcin Kolasa,Karol Murawski, Michał Rot, Bartosz Rybaczyk, Magdalena Tarnicka

2

Presentation plan

• Rationale for changing the forecasting model• Structure of the NECMOD model• Main blocks of NECMOD• Model's impulse response functions• Summary

3

Rationale for changing the forecasting model

4

Changes in the economy after 2004

5

Institutional changes

• Accession to the European Union and acceleration of the integration process with the European economy

• Globalisation and the strengthening impact of global shocks on the domestic economy

• Experience with the direct inflation targeting strategy

6

Main areas of changes in the economy (1)

• Labour market:– High volatility of the unemployment rate and the economic

activity rate amid moderate changes of wage pressure– Migration flows

• Housing market:– Soaring prices of houses and growing significance of the

wealth channel in shaping the behaviour of economic agents• Production sector and infrastructure:

– EU structural funds• Exchange rate:

– Appreciation trend which was not accompanied by any significant slump in trade competitiveness

7

Main areas of changes in the economy (2)

• Oil shock and food price rise:– Strong hike in prices of oil and commodities (including

agricultural products) on the world markets• Fiscal reforms and changes in regulations:

– Changes in tax and social security systems (both implemented and expected)

– Energy market deregulation• Expectations of economic subjects• New methodological challenges

– ESA 95 (transition from cash basis to accrual basis in the general government sector)

– Data biases

8

Forecasting experience

9

Short history of expert adjustments (1)

• National accounts:– Consumption growth rate (problems with disposable income

estimates)– Investment growth rate (the way of including structural funds)– Collective consumption

• Labour market:– NAWRU rate, business-cycle and institutional changes– Economic activity rate, business-cycle and institutional

changes– Wage growth rate– The role of migration– Adjustments due to data bias

10

• Potential product:– Problems with TFP measurement– Substitution between private and public capital– Low contribution of housing assets to potential GDP

growth• Changes in fiscal and regulatory policy

– Impact of tax changes and transfers on labour market and investment activity

– Impact on prices

Short history of expert adjustments (2)

11

Structure of the NECMOD model

12

Data

• Official sources– Main source: national accounts– Labour market: LFS data (adjusted for data bias)– General government: in line with ESA methodology (consistent

with national accounts)– Prices of consumer goods: in line with CPI basket– Financial data: NBP

• Own estimates– E.g. residential investment, series of capital

13

Main areas of changes (1)

• Extended supply side:– Endogenous rates of unemployment and economic activity – Disaggregation of fixed capital formation: productive investment

(corporate and public) and residential investment– Limited elasticity of substitution between private productive and

public capital

• Households:– Private consumption and residential investment derived from

coherent assumptions; the housing market is modelled from the demand and supply sides

– Remittances explicitly included in the households’ income

14

Main areas of changes (2)

• Distorting influence of fiscal expenditure and revenues:– Impact on labour market (economic activity, employment, wages,

NAWRU)– Impact on prices (cost channel, indirect taxes)

• Influence of structural funds:– Impact on private and public investment– Impact on labour market

• Equilibrium exchange rate adjustments consistent with the model's structure

15

• Modification of the block of prices: – New definition of core inflation– Food and energy prices dependent on external factors– Value added deflator as the main producer price index

• Introduction of expectations:– Equation of core inflation and value added deflator –

backward and forward-looking expectations– Real rates deflated with future (anticipated) inflation– Long-term rates are the composition of expected short-

term rates (adjusted for the risk premium)• Estimated monetary policy reaction function

Main areas of changes (3)

16

Main blocks of NECMOD

17

• Core: production function– Labour supply: adjusted LFS employment (accounting for

temporary migrations not fully covered in LFS data)– Productive capital: composition of private and public productive

capital in line with CES technology– TFP: deterministic trend

• Potential GDP– Determined by production function– Effective labour supply instead of actual labour supply– The long-run rate of growth of the total factor productivity (TFP)

instead of its short-run dynamics.

Production sector (1)

18

Production sector (2)

GDP – GDP, TFP_TREND – total factor productivity, EMP– employment, KN – net productive capital, KN_P – net corporate productive capital, KN_G – net public productive capital, GDPPOT – potential GDP, LF – labour force, NAWRU – equilibrium unemployment rate(*) – small letters denote logarithms of variables

(*) tttt kn0.67)(1emp0.67tfp_trendgdp ⋅−⋅+⋅+=

( ) ( )( ) 21

2t

32t

3t GKN0.3PKN0.7KN

−−− ⋅+⋅= __

[ ] ttttt kn0.67)(1LF)NAWRU(1log0.67tfp_trendgdppot ⋅−⋅+⋅−⋅+=

19

Demand for production factors (1)• Investment

– Two types of productive investment:• Private investment: determined by the equality of marginal

productivity of private capital and its real user cost• Public investment: investment expenditure of general

government; in the long run from the condition of equality of marginal productivity of private and public capital

– New way of modelling the impact of structural funds:• Funds flowing to the private sector: decreasing the cost of

private capital utilisation• Funds flowing to the general government sector: direct

transmission into public investment

20

Demand for production factors (2)

• First order condition for private investment:

GDP – GDP, KN – net productive capital, KN_P – corporate productive capital, RUCC– real user cost of capital

t

3

t

t

t

t3 RUCCKP_N

KNKN

GDP0.67)(10.7 =⎟⎟

⎠

⎞⎜⎜⎝

⎛⋅⋅−⋅

21

Demand for production factors (3)

• Private investment

GFCFP – investment in corporate productive capital, MPC –marginal product of private capital, RUCC - real user cost of capital, GDP – GDP, P_OIL – oil price, S_USD_PLN – USD/PLN exchange rate, adjusted for nominal-convergence effect, PVA –value added deflator, FINACC – contribution of enterprises’ disposable income to total national income

0.03Adj.R2 =

( ))(FINACCΔ0.02

pvas_usd_plnp_oilΔ0.006Δgdp)0.120.11(1

Δgfcfp0.12Δgfcfp0.11)RUCC(MPC0.31Δgfcfp

t40.35

ttt40.021t0.170.17

2t0.171t0.171t1t0.46t

⋅+

−+⋅−⋅−−+

⋅+⋅+−⋅=

−

−−−−

22

Demand for production factors (4)

• Demand on labour

– In the long-run determined by reversed production function

– Sources of short-term fluctuations:• Active labour market policy• Labour costs• Effective labour supply

23

Demand for production factors (5)• Demand on labour

EMP – employment, GDP – GDP, KN – net productive capital, TFP – total factor productivity, LF – labour force, NAWRU – equilibrium unemployment rate, WAGE_N –average wage in the economy, GR_CORP_TR – effective tax rate of social contribution paid by employer, PVA – gross value added deflator, ALMP_N – active labour market policy expenditures (both public and private from EU funds related to human capital development), GDPN – nominal GDP

0.62Adj.R2 =

( )

⎟⎟⎠

⎞⎜⎜⎝

⎛⋅+

−+⋅Δ⋅−

−⋅⋅−+⋅+

−⋅−−⋅−⋅=

−

−−−−

t

t

1.26

tttt0.04

tt1t0.09

1t1t1t1t0.03t

GDPNALMP_N

Δ2.05

/0.67)Δtfp_trend))/PVAGR_CORP_TR(1log(WAGE_N(0.02

))NAWRU(1Δlog(LF)0.74(1Δemp0.74

tfp_trendk0.67)(1emp0.67gdp0.0emp

09.0

9

24

Labour market (1)• Economic activity

– Modelled in three age groups of population: people aged 15-24, 25-44 and over 45

– To a large extent determined by changes in the age structure of the population

– Negative impact of unemployment rate on economic activity ("discouragement effect")

– Changes in social benefits systems in 1997 and 1999 were taken into account

– Negative impact of taxes (particularly those imposed on labour and consumption)

– Negative impact of alternative sources of income (benefits, social welfare, remittances from abroad)

25

Labour market (2)

LF_Y – labour force aged 15-24, POP_Y – population aged 15-24 lat, UNRATE –unemployment rate, D99q1 - variable controlling for the impact of changes in healthcare system, D97q1 - variable controlling for the impact of changes in unemployment benefit system, GR_EMP_TR – effective tax rate of social contribution paid by employees, GR_PIT_TR – effective rate of PIT, GR_HC_TR - effective rate of heath insurance, INTAX - effective rate of indirect taxes, MINW – minimal to average wage ratio, RR_REM –ratio of remittances to wage fund, STUDENT – share of full-time students in population aged 15-24

• Economic activity in group aged 15-24

rr_rem0.04STUDENT0.4minw0.14INTAX0.3)GR_HC_TRGR_PIT_TR(GR_EMP_TR0.3

D97q1)(10.02D99q1)(10.02UNRATE410.330.74

POP_YLF_Y

t

tttt

3

0iit

t

t

⋅−⋅−⋅++⋅−++⋅−

+−⋅+−⋅−⎟⎠

⎞⎜⎝

⎛ ⋅⋅−= ∑=

−

∗

26

Labour market (3)

• Economic activity in group aged 15-24

LF_Y – labour force aged 15-24, POP_Y – population aged 15-24, WAGE_N –average nominal wage in the economy, СPI – consumer price index, TFP - total factor productivity, STUDENT –share of full- time students in population aged 15-24

0.58Adj.R2 =

( )

t

ttt0.12t

2

0.080.08

2t2

0.081t0.081t

1t

1t

1t

0.16t

ΔSTUDENT0.40.67Δtfpcpiwage_nΔ0.13Δpop_y)0.430.43(1

Δlf_y0.43Δlf_y0.43POP_YLF_Y

POP_YLF_Y0.44Δlf_y

⋅−

⎟⎠⎞

⎜⎝⎛ −−⋅+⋅−−+

+⋅+⋅+⎟⎟⎠

⎞⎜⎜⎝

⎛−⋅−= −−

∗

−

−

−

−

27

Labour market (4)

• Economic activity in group aged 25-44

LF_M – labour force aged 25-44, POP_M – population aged 25-44 lat, UNRATE –unemployment rate, D99q1 - variable controlling for the impact of changes in healthcare system in 1999, D99q7 - variable controlling for the impact of changes in unemployment benefit system in 1997, GR_EMP_TR – effective tax rate of social contribution paid by employees, GR_PIT_TR – effective rate of PIT, GR_HC_TR -effective rate of heath insurance, INTAX - effective rate of indirect taxes, RR_NFL_M – expected replacement rate of basic social benefits for inactive population aged 25 –44

rr_nlf_m0.01INTAX0.1)GR_HC_TRGR_PIT_TR(GR_EMP_TR0.1

D97q1)(10.002D99q1)(10.004UNRATE410.040.89

POP_MLF_M

tttt

3

0iit

t

t

⋅−+⋅−++⋅−

+−⋅+−⋅−⎟⎠

⎞⎜⎝

⎛⋅+= ∑=

−

∗

28

Labour market (5)

• Supply of labour force aged 25-44

LF_M – labour force aged 25-44, POP_M – population aged 25-44

0.75Adj.R2 =

t2

0.090.092t2

0.09

1t0.091t

1t

1t

1t

0.10t

Δpop_m)0.230.23(1Δlf_m0.23

Δlf_m0.23POP_MLF_M

POP_MLF_M

0.28Δlf_m

⋅−−+⋅

+⋅+⎟⎟⎠

⎞⎜⎜⎝

⎛−⋅−=

−

−

∗

−

−

−

−

29

Labour market (6)

• Economic activity in group aged 45+

LF_O – labour force in group aged 25-44, POP_O – population aged 25-44, UNRATE –unemployment rate, D97Q1 - variable controlling for the impact of changes in unemployment benefit system in 1997, GR_EMP_TR – effective tax rate of social contribution paid by employees, GR_PIT_TR – effective rate of PIT, GR_HC_TR - effective rate of health insurance, INTAX - effective rate of indirect taxes on goods, RR_NFL_O –expected replacement ratio of basic social benefits for inactive population aged 45+, RR_RELIEF_KIND – replacement ratio of public benefits in kind, WORK_AGE –labour force aged 45-65 to those aged 45+ ratio, showing the ageing effect in this demographic group

ttt

ttt

t

3

0iit

t

t

kindrr_relief_0.04)WORK_AGE(10.27INTAX0.3)GR_HC_TRGR_PIT_TR(GR_EMP_TR0.3D97q1)(10.006

D07q10.02rr_nlf_o0.2UNRATE410.300.59

POP_OLF_O

⋅−−⋅−⋅−++⋅−−⋅+

⋅−⋅−⎟⎠

⎞⎜⎝

⎛ ⋅⋅−= ∑=

−

∗

30

Labour market (7)

• Economic activity in group aged 45+

LF_O – labour force in group aged 45, POP_O – population aged 45+, RR_NLF_O –expected replacement rate of basic social benefits for inactive population aged 45+

0.55Adj.R2 =

t0.03

0.00t2

0.130.13

2t2

0.131t0.131t

1t

1t

1t

0.12t

Δrr_nlf_o0.05

I99q3)I99q2(I99q10.01Δpop_o)0.150.15(1

Δlf_o0.15Δlf_o0.15POP_OLF_O

POP_OLF_O

0.14Δlf_o

⋅−

++⋅−⋅−−+

+⋅+⋅+⎟⎟⎠

⎞⎜⎜⎝

⎛−⋅−= −−

∗

−

−

−

−

31

Labour market (8)

• Wage equation– Cointegration relationships derived from the wage bargaining model,– The first order conditions for employee’s utility maximisation from

remuneration from work and profit of the enterprise, presented by two separate cointegration relationships interpreted as wage curve and price curve

– The price curve represents enterprises' decisions on prices, wages and employment

– The wage curve presents the relationship between the desired real wage of employees and their actual remuneration from work

• NAWRU (unemployment equilibrium rate)– Unemployment rate for which both cointegration relationships are

fulfilled, i.e. both maximisation conditions are met

32

Labour market (9)

• Wage equation

WAGE_N – average nominal gross wage in the economy, TFP – total factor productivity, CPI – Consumer Price Index, GR_EMP_TR – effective tax rate of social contributions paid by employees, GR_PIT_TR – effective rate of PIT, GR_HC_TR -effective rate of health insurance, GR_CORP_TR – effective tax rate of social contributions paid by employers, INTAX - effective rate of indirect taxes, UNRATE –unemployment rate, RR_UNEMP – replacement ratio of unemployment benefits, RR_REM – ratio of remittances to wage fund, POP_Y – population aged 15-24, POP –total population, MINW – minimum to average wage ratio

tt

tt

tttt

ttttt

minwPOP

POP_Y0.52rr_rem0.18GR_CORP_TR0.5

)GR_EMP_TRGR_HC_TR(GR_PIT_TR0.5rr_unemp0.11

UNRATE1.05INTAX0.5cpitfp_trend0.67

15.42wage_n

⋅⎟⎟⎠

⎞⎜⎜⎝

⎛⋅+⋅−⋅−

−++⋅+⋅+

⋅−⋅−+⋅⎟⎠⎞

⎜⎝⎛+=∗

33

Labour market (10)

• Price equation:

PVA – value added deflator, ULCNA – non- farm unit labour cost, PIMP – prices of imported goods, GR_TAR_TR – effective rate of import duties

D04Q20.11)GR_TAR_TR(pimp0.67)(1ulcna0.673.33pva tttt

⋅+++⋅−+⋅+−=∗

34

Labour market (11)

• Wage equation

WAGE_N – average nominal gross wage in the economy, PVA – value added deflator, CPI – Consumer Price Index, GDP – GDP, EMPNA – non- farm employment, UNRATE – unemployment rate

0.81 Adj.R2 =

I99q2)(I99q10.046)Δ(UNRATE0.46

)empnaΔ(gdp)0.67(1Δcpi)0.67(1Δwage_n0.67

)pva(pva0.047)wage_n(wage_n0.044Δwage_n

0.01t0.20

tt0.111t0.111t0.11

1t1t0.031t1t0.02t

−⋅−⋅−

−⋅−+⋅−+⋅+

−⋅−−⋅−=

−−

∗−−

∗−−

35

Labour market (12)

• NAWRU

( ) )rr_rem0.185.383.33/0.67tfp_trend1)(1/0.67

)k0.67)(lf(1LF

EMP_A)pvaGR_TAR_TR(pimp0.67

0.671

minwPOP

POP_Y0.52rr_unemp0.11

)GR_CORP_TRGR_EMP_TRGT_HC_TR(GR_PIT_TR0.5

)INTAX0.5D04Q2)(0.11/0.67pva((cpi1.05)0.67(1NAWRU

tt

ttt

tttt

tt

tt

tttt

ttt1

t

⋅−+−⋅−+

−−+−−+⋅−+

+⋅⎟⎟⎠

⎞⎜⎜⎝

⎛⋅+⋅+

++++⋅+

+⋅−⋅+−⋅+−= −

36

Household expenditure (1)

• Remittances (source: NBP) explicitly included in disposable income (own estimates)

• Expenditure on private consumption and residential investment • Modelling of households’ spending derived from life cycle theory and

permanent income theory• Permanent income proxied by weighted average of disposable

income and wealth• Wealth = Private productive capital + Residential capital + Public debt

+ Net foreign assets• Residential investment modelled from the supply side whereas

housing assets deflator modelled from the demand side - it ensures that in response to demand shock, the reaction of prices outpaces the reaction of investment

37

Household expenditure (2)

CONP – individual consumption of households, YD – real disposable income of households, I_3MR_CPI – real 3-month interest rate (deflated with future CPI inflation), WEALTH – wealth of households

0.28Adj.R2 = 04.0=− statJ

• Individual consumption of households:

I)Δ(I_3MR_CP0.13Δyd0.13)conp(conp0.100.01Δconp0.09t0.041t1t0.040.00t ⋅−⋅+−⋅−−= ∗

−−

tttt I_3MR_CPI0.31wealth0.90)(1yd0.900.28conp ⋅−⋅−+⋅+−=*

38

Household expenditure (3) • Residential investment modelled from the supply side:

GFCF_H – gross residential investment, GDP_POT – potential GDP, PGFCF_H –prices of housing assets, PVA – value added deflator

0.61Adj.R2 =

)pva(pgfcf_h0.273.36gdp_potgfcf_h tttt −⋅+−=−*

I03Q40.16I02Q30.23I02Q20.13)gfcf_h(gfcf_h0.26

Δgfcf_h)0.220.62(1Δgfcf_h0.22Δgdp_pot0.62Δgfcf_h

0.050.050.041t1t0.08

2t0.130.201t0.13t0.20t

⋅−⋅−⋅+−⋅−

+⋅−−+⋅+⋅=∗−−

−−

39

Household expenditure (4)

• Housing assets deflator modelled from demand side (equating marginal utility of owning a dwelling with real cost of its utilisation)

PGFCF_H – prices of housing assets, CPI – Consumer Price Index, K_H – residential capital stock, GAP – output gap, DISC_H – depreciation rate of residential capital, I_H– interest rate on housing loans, RUCC_H – real user cost of residential capital

0.81Adj.R2 =⎥⎦

⎤⎢⎣

⎡⎟⎟⎠

⎞⎜⎜⎝

⎛−−+⋅⋅−

++−⋅−⋅−+⋅=

−

−

∗−−−−

1PGFCF_HPGFCF_H

I_HDISC_H4D0.13

GAP0.26)k_h(k_h0.12Δcpi)0.80(1Δpgfcf_h0.80 Δpgfcf_h

5t

1ttt0.05

t0.111t1t0.041t0.071t0.07t

( )hrucc0.31conp0.56k_h tt _* −+=

40

Prices (1)

• Prices of consumer goods:– New measure of core inflation (CPI net of food and energy prices)– Singled out and modelled separately

• Food prices • Prices of energy products

• Producer prices:– Value added deflator - main index of producer prices, basis for

determining relative prices– GDP deflator used for determining nominal GDP

41

Prices (2)

• Core prices:

CORECPI – Consumer Price Index net of prices of energy products and food, ULCNA – non- farm unit labour cost, PIMP_CORE – prices of imported goods excluding prices of oil and natural gas, BS_TREND – trend (constant since 2002q3), GR_TAR_TR –effective rate of import duties, GR_VAT_TR – effective VAT rate, GR_GAM_TR -effective gambling tax rate, GR_EXT_REST_TR - effective rate of other (non-energy) excise taxes

tttt

tttt

T_TRGR_EXT_RESGR_GAM_TRGR_VAT_TRBS_TREND)GR_TAR_TR(pimp_core)0.6(1ulcna0.64.11corecpi

+++++⋅−+⋅+−=∗ 66

42

Prices (3)

• Core prices:

CORECPI – Consumer Price Index net of prices of energy products and food,INF_TARGET – inflation target, PIMP_CORE – prices of imported goods net of oil and gas prices, GR_TAR_TR – effective rate of import duties, ULCNA – non- farm unit labour cost,

( )

ttt0.01

1t0.081t0.051t1t0.01

41

1

2iit0.010..080.05t

Δulcna0.0430.66)GR_TAR_TReΔ(pimp_cor0.0430.66)(1

Δcorecpi0.36Δcorecpi0.54)corecpi(corecpi0.024

1INF_TARGET4110.0430.360.541Δcorecpi

⋅⋅++⋅⋅−+

⋅+⋅+−⋅−

+⎟⎟⎟

⎠

⎞

⎜⎜⎜

⎝

⎛−⎟

⎠

⎞⎜⎝

⎛ ⋅+−−−=

+−∗

−−

−=−∑

0.14stat0.98 JAdj.R2 =−=

43

Prices (4)

• Value added deflator:– GDP deflator = value added deflator adjusted for net indirect taxes,

PVA – value added deflator, ULCNA – non- farm unit labour cost, PIMP – prices of imported goods, GR_TAR_TR – effective rate of import duties

D04Q20.11)GR_TAR_TR(pimp0.67)(1ulcna0.673.33pva tttt

⋅+++⋅−+⋅+−=∗

44

Prices (5)

• Value added deflator:– GDP deflator = value added deflator adjusted for net indirect taxes

PVA – value added deflator, INF_TARGET – inflation target, PIMP – prices of imported goods, GR_TAR_TR – effective rate of import duties, ULCNA – non-farm unit labour cost

( )

( ) τtt0.02

1t0.041t0.02

1t1t0.01

41

1

2tit0.020.040.02τ

Δulcna0.250.67GR_TAR_TRpimpΔ0.250.67)(1

Δpva0.33Δpva0.26

)pva(pva0.0231ΙΝF_ΤΑRGΕΤ4110.250.330.261Δpva

⋅⋅++⋅⋅−+

⋅+⋅+

+−⋅−⎟⎟⎟

⎠

⎞

⎜⎜⎜

⎝

⎛−⎟

⎠

⎞⎜⎝

⎛ ⋅+−−−=

+−

∗−−

−=−∑

0.16stat0.66 JAdj.R2 =−=

45

Prices (6)

• Food prices:

FOODCPI – food price index, CORECPI – Consumer Price Index net of prices of energy products and food, P_FOOD – world price index of raw agriculture commodities , S_USD_PLN – USD/PLN exchange rate adjusted for nominal convergence effect

t

tttt

GR_VAT_TR0.49corecpi0.49)(1)s_usd_pln(p_food0.492.08foodcpi

⋅+⋅−++⋅+−=∗

46

Prices (7)• Food prices:

FOODCPI – food price index, CORECPI – Consumer Price Index net of prices of energy products and food, P_FOOD – world price index of raw agriculture commodities , S_USD_PLN – USD/PLN exchange rate adjusted for nominal convergence effect

0.57Adj.R2 =

)s_usd_plndΔlog(p_foo)0.410.54(1

)foodcpi(foodcpi0.084Δcorecpi0.41Δfoodcpi0.54Δfoodcpi

1t1t0.140.13

1t1t0.041t0.141t0.13t

−−

∗−−−−

+⋅−−+

+−⋅−⋅+⋅=

47

Prices (8)• Prices of energy products

• Food and energy products prices are adjusted by experts in the projection horizon

ENERCPI – energy product price index, CORECPI – Consumer Prices Index net of prices of energy products and food, P_ENER – world raw energy commodities price index, S_USD_PLN – USD/PLN exchange rate adjusted for nominal convergence effect, GR_EXT_REST_TR – effective excise tax rate – other goods,GR_EXT_ENER_TR – effective excise tax rate – energy products

ttt

tttt

R_TRGR_EXT_ENE)T_TRGR_EXT_RES(corecpi0.45)(1)GR_VAT_TRs_usd_pln(p_ener0.452.1enercpi

+−⋅−+++⋅+−=∗

48

Prices (9)• Prices of energy products:

ENERCPI – energy product price index, CORECPI – Consumer Prices Index net of prices of energy products and food, P_ENER – world raw energy commodities price index, S_USD_PLN – USD/PLN exchange rate adjusted for nominal convergence effect, GR_EXT_REST_TR – effective excise tax rate – other goods,GR_EXT_ENER_TR – effective excise tax rate – energy products

0.40Adj.R2 =

I98q10.037ERΔGR_EXT_EN)0.45(1

)s_usd_plnΔ(p_ener0.062)enercpi(enercpi0.071

)T_TRGR_EXT_RESΔ(corecpi)0.0630.45(1Δenercpi0.45Δenercpi

0.01t0.12

tt0.021t1t0.03

tt0.020.121t0.12t

⋅+⋅−+

++−⋅−

−⋅−−+⋅=∗−−

−

49

External sector (1)

• Volume of exports – modelled from the supply side in the long run, from the demand side in the short run:– Exports as function of relative export prices, potential GDP and external

demand

• Volume of imports – modelled from the supply side– Imports as function of relative import prices, GDP, domestic demand

(weighted by import absorption)

50

External sector (2)

• Volume of exports

GDP_EXP – volume of exports, GDP_POT – potential GDP, PEXP – deflator of exports, PVA – value added domestic deflator, t – trend connected with gradual integration of Polish economy

1.50D05q20.07t0.01)pva(pexp0.57)gdp_pot(gdp_exp tttt

−⋅++⋅+−⋅=− ∗

51

External sector (3)

• Volume of exports

0.26 Adj.R2 =

GDP_EXP – volume of exports, GDP_POT – potential GDP, GDP_EXT – external product,

0.01I05q20.030.005)gdp_ext( 1.91))gdp_pot(gdp_exp

)gdp_pot(gdp_exp(0.24)gdp_potΔ(gdp_exp

0.02t0.88

1t1t

1t1t0.07tt

+⋅+−⋅++−−

+−⋅−=−∗

−−

−−

Δ

52

External sector (4)

• Volume of imports

GDP_IMP – volume of imports, GDP – GDP, PIMP_CORE – prices of imported products excluding oil and gas prices, GR_TAR_TR – effective rate of duties, PVA –value added deflator, t – trend connected with gradual integration of Polish economy

1.55t0.01

))/PVAGR_TAR_TR(1ORElog(PIMP_C0.33)gdp(gdp_imp ttttt

−⋅+

+⋅⋅−=− ∗

53

External sector (5)

• Volume of imports

GDP_IMP – volume of imports, GDP – GDP, GFCF – total gross fixed capital formation, CONP – individual consumption, GDP_EXP – volume of exports, TFP_TREND – total factor productivity, PIMP_CORE – prices of imported goods excluding prices of oil and natural gas, GR_TAR_TR – effective rate of import duties, PVA –value added deflator

0.47 Adj.R2 =

)/PVAGR_TAR_TR)(1COREΔlog(PIMP_0.19

)TFP_TREND

GDP_EXP0.4CONP0.2GFCF0.4Δlog(1.15

))gdp(gdp_imp

)gdp((gdp_imp0.070.01)gdpΔ(gdp_imp

ttt0.12

1/0.67t

ttt

0.21

1t1t

1t1t0.04tt

+⋅−

+++⋅+

+−−

+−⋅−=−∗

−−

−−

54

External sector (6)

• Export and import prices: according to the notion of price maker –price taker

0.37Adj.R2 =

PEXP – exports prices, GDP – GDP, PVA_EXT – external value added deflator, S_NEER – nominal effective exchange rate adjusted for nominal convergence effect, PVA – domestic value added deflator, GDP_POT – potential GDP in Poland, GDP_EXT_POT – external potential GDP

3.200.35)pva(1)s_neer(pva_ext0.35pexp tttt −−++=∗

t0.07tt0.07

1t1t0.09t

Δpva)0.31(1)s_neerΔ(pva_ext0.31

)pexpexpp(0.21Δpexp

⋅−++⋅+

−−= ∗−−

55

External sector (7)

• Export and import prices: according to the notion of price maker –price taker

0.34Adj.R2 =

PIMP_CORE – import prices excluding oil and gas prices, PVA_EXT – external value added deflator, S_NEER – nominal effective exchange rate adjusted for nominal convergence effect, PVA – domestic value added deflator, GDP_POT – potential GDP in Poland, GDP_EXT_POT – external potential GDP

t0.09tt0.09

1t1t0.10t

Δpva)0.36(1)s_neerΔ(pva_ext0.36

)pimp_core(pimp_core0.22Δpimp_core

⋅−+++

−−= ∗−−

5.28p_va0.54)(1)s_neer(pva_ext0.54pimp_core tttt −⋅−++⋅=∗

56

External sector (8)• Nominal exchange rate:

S_NEER – nominal effective exchange rate, PVA – value added deflator, PVA_EXT –external gross value added deflator, GDP_POT – potential GDP, GDP_EXT_POT –external potential GDP, I_3MR_PVA – real 3-month interest rate (deflated with gross value added deflator), I_3MR_EXT – external real interest rate, NFA_GDP – net foreign assets in relation to GDP

D06q30.06D04q20.069.11)I_3MR_EXT(I_3MR_PVA1.28NFA_GDP0.25

)tgdp_ext_po(gdp_pot0.6pva_extpvas_neer

1t1t1t

ttttt

⋅−⋅−++−⋅−⋅−

+−⋅−−=

−−−

∗

57

External sector (9)• Nominal exchange rate:

S_NEER – nominal effective exchange rate, PVA – value added deflator, PVA_EXT –external gross value added deflator, GDP_POT – potential GDP, GDP_EXT_POT –external potential GDP, I_3MR_PVA – real 3-month interest rate (deflated with gross value added deflator), I_3MR_EXT – external real interest rate

0.01stat0.13 JAdj.R2 =−=

)I_3MR_EXTAΔ(I_3MR_PV0.64

)tgdp_ext_poΔ(gdp_pot0.37

)pva_extΔ(pva0.51)s_neer(s_neer0.27Δs_neer

tt0.97

tt1.12

tt0.511t1t0.06t

−⋅−

+−⋅−

+−⋅+−⋅−= ∗−−

58

External sector (10)• Equilibrium exchange rate (s_reer*):

– Modelled explicitly in line with the theory of fundamental equilibrium exchange rate (FEER), cf. Rubaszek (2005)

– Derived from long-run relationships of the external block for given long-run macroeconomic proportions (other variables marked with *)

– Objective: • Possibility to include adjustments of the mid-term exchange rate path in a way that is

consistent with the model's structure• Enhancing simulation possibilities

S_REER – real effective exchange rate, GDP_POT – potential GDP in Poland, GDP_EXT_POT – external potential GDP, GR_TAR_TR – effective rate of import duties, PIMP_OILGAS_R – relative prices of imported commodities, CAB_INC_GDP – income account in relation to GDP, CAB_TRANS_GDP –balance on current transfers in relation to GDP, CAB_GDP – current account balance in relation to GDP, *stands for equilibrium levels

{ }*

*

exp 0.35 (1 0.57) _ 1.50 0.01 0.07 05 2 3.20 (1 0.57) 0.6 0.35 (1 0.57) ( _ _ _ )

exp 0.54 (1 0.33) _ 1.55 0.01 5.27 (1 0.33) 0.6 0.54 (1 0.33) ( _ _ _ ) 0.33

s reer t D q gdp pot gdp ext pot

s reer t gdp pot gdp ext pot g

⋅ + ⋅ − + ⋅ + ⋅ − ⋅ + + ⋅ ⋅ + ⋅ − =

= ⋅ − ⋅ − + ⋅ − ⋅ − + ⋅ ⋅ − ⋅ − − ⋅{ }( )0.062 0.026* * * *

_ _

_ _ _ _ _ _ _

r tar tr

PIMP OILGAS R CAB INC GDP CAB TRANS GDP CAB GDP+

⋅

− − +

59

Interest rates (1)

• All real interest rates deflated with future inflation• Long-term interest rates:

– Composition of expected short-term interest rates– Adjustment for risk premium (situation of public finance sector, inflation

expectations)

0.23at0.94 J_stAdj.R2 ==

I_5Y – 5-year interest rate, I_3M – 3-month interest rate, G_BALANCE_GDP –general government balance in relation to GDP

t0.050.001ttt GDPG_BALANCE_0.150.01I_5Y0.06)(1I_3M0.06I_5Y ⋅−−⋅−+⋅= +

60

Interest rates (2)

• Short-term interest rates:– Estimated Taylor's Rule

I_3M – 3-month interest rate, I_3M_EQ – real interest rate in long-term equilibrium, INF – CPI inflation, INF_TARGET – inflation target, GAP – output gap

)GAP0.59)INF_TARGET41(INF0.99

INF(I_3MR_EQ0.88)(1I_3M.880I_3M

t0.05

0

3iit1t0.07

1t1t0.00t

⋅+−⋅+

++⋅−+⋅=

∑−=

−+

+−

0.33t0.98 J_staAdj.R2 ==

61

Model's impulse response functions

62

Monetary impulse1 percentage point interest rate increase in the 1st quarter. In

subsequent periods interest rate consistent with estimated Taylor's Rule.

Monetary impulse - Inflation

-0.2

-0.15

-0.1

-0.05

0

0.05

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19years

devi

atio

n fr

om t

he b

asel

ine

scen

ario

in p

.p.

Monetary impulse - GDP growth rate

-0.14

-0.12

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19years

devi

atio

n fr

om t

he b

asel

ine

scen

ario

in p

.p.

63

Exchange rate impulse10-percent appreciation in the 1st quarter. In subsequent periods

exchange rate consistent with the equation. Taylor's Rule activated.

Exchange rate impulse - Inflation

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19years

devi

atio

n fro

m th

e ba

selin

e sc

enar

io in

p.p

.

Exchange rate impulse - GDP growth rate

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

yearsde

viat

ion

from

the

base

line

scen

ario

in p

.p.

64

Fiscal impulseReduction in current expenditure of general government (in purchase of goods and services section) of 1% of GDP in the 1st quarter. Starting from the next period, expenditure return to the "old path" (increase of

1% of GDP) and then continue consistently with model equation. Taylor's Rule activated.

Fiscal impulse - Inflation

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19years

devi

atio

n fro

m t

he b

asel

ine

scen

ario

in p

.p.

Fiscal impulse - GDP growth rate

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19years

devi

atio

n fro

m t

he b

asel

ine

scen

ario

in p

.p.

65

Summary

66

General characteristics of the NECMOD model

• It reflects the evolution of the economy over the past few years(and, as is our intention, also in the years to come) as well as the richer forecasting experience of the team

• It refers to a number of model-related analyses and studies• Hybrid-like character of the model and its long-term stability have

been preserved• The supply side of the economy has been extended and elaborated

in greater detail (potential product, equilibrium unemployment rate, equilibrium rate of economic activity, equilibrium exchange rate)

• Expectations are modelled explicitly• Potential simulation possibilities can provide answers to many

topical questions (impact of fiscal changes, structural funds, emigration)

67

Forecasting features of the NECMOD model

• Possibility of constructing a more coherent and comprehensive story for forecasting scenarios

• Less invasive and more coherent expert adjustments• Forecasting process can be streamlined• Greater flexibility of the model in terms of forecasting and

simulation exercises • "Embedding" of some expert adjustments of the past few years

and/or extension of critical blocks• Updating the equations with 2007 data