The economics underlying NiGEM


NiGEM is an estimated model, which uses a 'New-Keynesian' framework in that agents are presumed to be forward-looking but nominal rigidities slow the process of adjustment to external events.

A policy-advice model, NIGEM is also designed to be flexible where assumption on behaviour and policy can be changed. Agents can be assumed to look forward in some scenarios, but not in others. Financial markets are normally assumed to look forward and consumers are normally assumed to be myopic but react to changes in their (forward looking) financial wealth. Monetary policy is set according to rules, with defaults designed for speed. However, interest rate feedback rules can be changed, and their parameters adjusted.

Hence there is no such thing as 'the NiGEM simulation results suggest ' but rather, 'under these assumption the NiGEM simulation results suggest '. This is perhaps different from the options given by others in their models, and it reflects the widespread use of the model for policy analysis.

The structure of the NIGEM is designed to correspond to macroeconomic policy needs. NiGEM is a structured around the national income identity, can accommodate forward looking consumer behaviour and has many of the characteristics of a Dynamic Stochastic General Equilibrium (DSGE) model. NiGEM is based on estimation using historical data, it thus strikes a balance between theory and data and enables using the NIGEM both for policy analysis and forecasting.

Although New Keynesian and DSGE models are frequently assumed to be the same, they incorporate distinct approaches. New Keynesian models often involve a small number of equations, estimated in a VAR and specified in logarithms. A good recent example being that used by Gali and Moncelli (2005). They describe output, price formation, the monetary feedback rule, the trade balance and the exchange rate and include forward looking behaviour. DSGE models, such as those stemming from Rotemberg and Woodford (1997) are based on the national income identity, which links the optimising behaviour of individuals.

In New Keynesian models, fiscal multipliers are inherently constant over time unless of the model are forced to be time dependent. More complete DSGE style models link logarithmic equations through linear identities, multipliers do not directly link to parameters but also depend on levels of openness and financial sophistication.

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