Interdependence of Real, Financial and Export Import Indicators in a DSGE Model of Multiple Countries

Abstract

Interdependence, which is a consequence of the international division of labor and use of the world’s natural resources, increases at the global level. Macroeconomic indicators of each country are more exposed to shocks arising in the country and in partner countries. In this paper, we propose a model of dynamic stochastic general equilibrium (DSGE) of many countries. For each country, the variables of output, inflation, interest rate, exchange rate, terms of trade, as well as exports and imports for each pair of countries are included in the model. In accordance with the number of countries the model contains equations of dynamic IS and New Keynesian Phillips curves and equations of monetary policy. The estimation of the model was implemented for the economies of Kazakhstan, Russia and the EU. An asymmetrical interaction of large and small economies is taken into account. The analysis of the impact of internal and external shocks on the macroeconomic variables is performed for each country/region. Responses of indicators on various shocks are obtained. For example, a positive technology shock in the country leads to the negative reaction of output, inflation and interest rate variables, as well as having a positive impact on imports and the negative impact on exports in each partner country. Cost-push as well as monetary policy shocks reduce imports and increase exports, and this is also observed for a couple of countries where there is no such a shock. It is revealed that the value of the response does matter to the size of the economy. The model allows analyzing the effects of the macroeconomic policies of trading partners to the fluctuations of the various shocks. The model can be extended in various directions.