M A -L L I , O I P R D E W O M O - S , O P D W P AC CR RO IN NK KA AG GE ES IL L RI IC CE ES S A AN ND D EF FL LA AT TI IO ON N OR RK KS SH HO OP J A 6– –9 9, , 20 00 09 9 J 6 2 AN NU UA AR RY Y DSGE Modelling at the Banco de Portugal Ricardo Mourinho Félix Economics and Researach Department Banco de Portugal
DSGE modelling at the Banco de Portugal Ricardo Mourinho F´ elix Economics and Research Department, Banco de Portugal IMF Macro Modelling Workshop Washington, DC January 6-9, 2009 R. F´ elix (BdP) IMF Workshop 1 / 47
Outline 1 DSGE models at the Banco de Portugal 2 Introducing and calibrating PESSOA Households and labour unions Firms Government Rest of the world and market clearing Calibration 3 Increasing competition in the domestic markets Motivation of the paper Simulation design and results Main findings 4 Ongoing research using PESSOA 5 Directions for further research R. F´ elix (BdP) IMF Workshop 2 / 47
DSGE models at the Banco de Portugal DSGE models at the Banco de Portugal DSGE modelling activities started in 2005 Available DSGE models EA-US model Alves, N., S. Gomes and J. Sousa (2007) PESSOA model Almeida, V., G. Castro and R. F´ elix (2008) Ongoing DSGE research projects Available models are being used in applied research EAGLE model: joint project with ECB and Banca d’Italia Identification issues in DSGE models Credit frictions in DGSE models R. F´ elix (BdP) IMF Workshop 3 / 47
Introducing and calibrating PESSOA Introducing PESSOA PESSOA P ortuguese E conomy S tructural S mall O pen economy A nalytical model Almeida, Vanda, Gabriela Castro and Ricardo Mourinho F´ elix (2008) “Improving competition in the non-tradables goods and labour market” WP 16/2008, Banco de Portugal R. F´ elix (BdP) IMF Workshop 4 / 47
Introducing and calibrating PESSOA Introducing PESSOA : the model Figure 1: Model flowchart Households Government Labour unions Tradable goods Non-tradable goods manufacturers manufacturers Consummer Investment Export Governm. consump. goods retailers goods retailers goods retailers goods retailers Foreign costumers Foreign suppliers R. F´ elix (BdP) IMF Workshop 5 / 47
Introducing and calibrating PESSOA Introducing PESSOA : the model General features SOE integrated in a monetary union (=euro area) 6 types of agents: Households Labour unions Manufacturers (intermediate goods producers) Distributors (final goods producers) Government Rest of the world (=euro area ⇒ S = 1) Labour and product differentiation Competition: monopolistic in output markets, perfect in input markets Real and nominal rigidities (quadratic adjustment costs) R. F´ elix (BdP) IMF Workshop 6 / 47
Introducing and calibrating PESSOA Introducing PESSOA : the model PESSOA is largely inspired on GIMF (Kumhof, M. and M. Laxton (2007)) PESSOA GIMF Small-open economy model Multi-country model Exogenous monetary policy Endogenous monetary policy No role for public investment Public investment plays a role Trade in semi-finished goods Trade in intermediate and final goods Heterogeneous import contents Homogeneous import content R. F´ elix (BdP) IMF Workshop 7 / 47
Introducing and calibrating PESSOA Households and labour unions Households (I) General features Blanchard-Yaari overlapping generations, declining lifetime productivity Liquidity constrained and liquidity unconstrained ( H ∈ { LIQ, OLG } ) Consume goods from distributors, supply labour to a union Pay taxes on consumption and labour income, receive transfers External habit persistence OLGs’ specific features Own firms Hold domestic and foreign bonds R. F´ elix (BdP) IMF Workshop 8 / 47
Introducing and calibrating PESSOA Households and labour unions Households (II) CRRA utility 1 − γ � η H � C H a,t ( h ) 1 a,t ( h )) 1 − η H U H (1 − L H a,t ( h ) = Hab H 1 − γ a,t Budget constraints OLG: P t C OLG a,t ( h ) = (1 − τ L,t ) W t Φ a L OLG ( h ) + Tansfers OLG ( h ) + B a,t ( h ) + B ∗ ( h )+ a,t a,t a,t + 1 � � i t − 1 B a − 1 ,t − 1 ( h ) + i ∗ t − 1 B ∗ a − 1 ,t − 1 ( h ) + Dividends a,t ( h ) θ LIQ: P t C LIQ ( h ) = (1 − τ L,t ) W t Φ a L LIQ a,t ( h ) + Transfers LIQ a,t ( h ) a,t where P t = P C t (1 + τ C,t ) is the numeraire. R. F´ elix (BdP) IMF Workshop 9 / 47
Introducing and calibrating PESSOA Households and labour unions Households (III) Utility maximisation problems OLG: ∞ ( βθ ) s U OLG � max E t a,t + s ( h ) C OLG ( h ) ,L OLG ( h ) ,B a,t ( h ) ,B ∗ a,t ( h ) s =0 a,t a,t s.t. Intertemporal budget constraint OLG t LIQ: ∞ ( βθ ) s U LIQ � max E t a,t + s ( h ) C LIQ ( h ) ,L LIQ ( h ) s =0 a,t a,t s.t. Intratemporal budget constraint LIQ t Wealth hw t + fw t = human wealth+financial wealth R t + s = Π s ˜ l =1 θ/i t + l − 1 human wealth discount factor R. F´ elix (BdP) IMF Workshop 10 / 47
Introducing and calibrating PESSOA Households and labour unions Labour unions General features Hire labour from households, rent it to manufacturers charging a markup Pay tax on “dividend” arising from monopolistic competition Quadratic wage growth adjustment costs Dividend D U � � t ( h ) = 1 − τ L,t [( V t ( h ) − W t ) U t ( h ) − Adj.costs t ( h )] Dividend maximisation problem ∞ � ˜ R t + s D U max E t t + s ( h ) V t ( h ) s =0 s.t. Adj.costs, Type h labour demand R. F´ elix (BdP) IMF Workshop 11 / 47
Introducing and calibrating PESSOA Firms Manufacturers (I) General features Produce tradable and non-tradable goods ( J ∈ { T, N } ), using labour from unions and capital (formed with investment good from distributors) Pay social security contributions on wage bill, tax on dividends Quadratic price growth and investment adjustment costs Production function ξZJ � ξZJ − 1 � ξZJ − 1 � � ξZJ − 1 1 1 � � Z J (1 − α J K J ξZJ + ( α J T t A J t U J ξZJ t ( j ) = U ) ξZJ t ( j ) U ) ξZJ t ( j ) Capital accumulation equation K J t +1 ( j ) = (1 − δ J ) K J t ( j ) + I J t ( j ) R. F´ elix (BdP) IMF Workshop 12 / 47
Introducing and calibrating PESSOA Firms Manufacturers (II) Dividend � � D J P J t ( j ) Z J t ( j ) − (1 + τ SP,t ) V t U J t ( j ) − P I t I J t ( j ) − (Fix.+Adj.costs) J t ( j ) = t ( j ) − � � � � P J t ( j ) Z J t ( j ) − (1 + τ SP,t ) V t U J t ( j ) − P I q J t δ J K J − (Fix.+Adj.costs) J − τ K,t t ( j ) t ( j ) t Dividend maximisation problem ∞ � ˜ R t + s D J max E t t + s ( j ) P J t ( j ) ,I J t ( j ) ,U J t ( j ) ,K J t +1 ( j ) s =0 s.t. Cap.accum.equation, Prod.function, Adj.costs, Type j intermediate good demand R. F´ elix (BdP) IMF Workshop 13 / 47
Introducing and calibrating PESSOA Firms Distributors (I): General features Two-stage production technology 1st stage Produce composite tradable good using domestic tradables and imported goods Quadratic import content adjustment costs 2nd stage Produce private and government consumption, investment and export goods ( F ∈ { C, I, G, X } ) using tradable good produced in 1st stage and non-tradable goods from domestic manufacturers Pay tax on profits Quadratic price growth adjustment costs R. F´ elix (BdP) IMF Workshop 14 / 47
Introducing and calibrating PESSOA Firms Distributors (II): 1st stage Production function ξAF � ξAF − 1 �� ξAF − 1 1 1 ξAF − 1 Y AF ZT F MF 1 − Γ AF ξAF � ξAF ξAF � � ξAF ( f ) = ( αAF ) ( f ) + (1 − αAF ) t ( f ) ( f ) t t t Cost C F t ( f ) = P T t Z T F t M F ( f ) + P ∗ t ( f ) t Cost minimisation problem C F min t ( f ) Z T F ( f ) ,M F t ( f ) t s.t. Prod.function, Adj.costs R. F´ elix (BdP) IMF Workshop 15 / 47
Introducing and calibrating PESSOA Firms Distributors (III): 2nd stage Production function ξF � � ξF − 1 � ξF − 1 � ξF − 1 1 1 � � ξF ξF Y F Y AF Z NF t ( f ) = (1 − α F ) ξF ( f ) + ( α F ) ξF ( f ) t t Dividend � � D F P F t ( f ) Y F t ( f ) − Λ AF ( f ) Y AF ( f ) − P N t Z NF ( f ) − (Fix.+Adj.costs) F t ( f ) = (1 − τ D,t ) t ( f ) t t t Dividend maximisation problem ∞ � ˜ R t + s D F max E t t + s ( f ) P F t ( f ) ,Y AF ( f ) ,Z NF ( f ) t t s =0 s.t. Prod.function, Adj.costs, Type f final good demand R. F´ elix (BdP) IMF Workshop 16 / 47
Introducing and calibrating PESSOA Government Government General features Collects taxes, pay/receives transfers, consumes, issues debt Budget constraint SG t = Taxes t − P G t G t + NetTransfers G t B t = B t − 1 − SG t − ( i t − 1 − 1) B t − 1 Structural budget balance fiscal rule � RV t − RV ss � tar � tar � SG � � SG � � B t � B � t = + d tax + d debt − GDP ss GDP ss GDP GDP GDP t t t t t Labour income tax rate is set endogenously R. F´ elix (BdP) IMF Workshop 17 / 47
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