The Better Policy Project

This course is based on using the historical-narrative approach to develop plausible estimates of potential output, NAIRU, and neutral short-term interest rate that are relevant for assessing conventional trade-offs relevant for monetary and  fiscal policy. The global financial crisis and the experiences so far in responding to the COVID19–related shocks has shown the importance of coordinating monetary, fiscal  and financial-sector policies. The methodology that is employed includes the production of medium-term projections for GDP, unemployment, inflation, capacity utilization, short-term and long-term interest rates as well as key latent variables such as potential output, the NAIRU, the equilibrium short–term real interest rate and the 10-year government term premium. Consequently, the framework also allows researchers to study the implications of uncertainty in key variables such as potential growth and the world real interest rate. Participants will be shown a completely transparent system up to the standards of the best policy-making institutions for reporting all details that are essential for understanding the construction of the medium-term scenarios and the measures of all the latent variables. This course will also be a prerequisite for more intensive collaboration where The Better Policy Project trainers/coaches will help people apply the methodology to other countries.

The course will start by emphasizing the importance of getting the policy and economic concepts down. Much time has been wasted when the concepts have been either confusing or used mistakenly. This includes using things like the HP filter which provides estimates of trends (not potential output!). While using univariate techniques such as HP filter is virtually cost less, they have no connection to the concepts of potential GDP that is necessary for thinking about managing the short-run output-inflation trade-off. In addition, confusing atheoretical concepts of the output gap that are relevant for measuring the financial cycle and concepts that are based on measuring the deviation between aggregate demand and aggregate supply can totally mess up our analysis of monetary, fiscal and financial cycle policies.

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The course is based on the U.S. example. Participants will receive the code and will be involved in hands-on training to understand all the equations and do changes in the code. The participants will be able to see advantages and disadvantages of each estimation method by doing Root Mean Square Error and historical rolling-forecast analysis.

Current version of the course will use IRIS/MATLAB for modeling exercises, but at some point in the near future, there will also be versions in Dynare/JULIA, which is a 100% free open-source software.

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Prerequisites:

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• ​Have at least intermediate knowledge in statistics and macroeconomics.

• MATLAB 2020a or later versions. 

• Being an intermediate user of IRIS/Matlab would be an asset but no previous knowledge of it is required as there will be a special mini-course for beginners.

• MiKTeX.

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The outcomes from the course:

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• Knowledge on potential estimation (theory and techniques).

• Full package of model code.

• Certificate of completion.

• Further assistance (subject to discussion).

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Reading Material:

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• Laxton D., A. Kostanyan, A. Liqokeli, G. Minasyan, A. Nurbekyan and T. Sopromadze, 2019, "Mind the Gaps! Financial-Cycle Output Gaps and Monetary-Policy-Relevant Output Gaps," London School of Economics and Political Science

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• Alichi, A., H. Avetisyan, D. Laxton, S. Mkhatrishvili, A. Nurbekyan, L. Torosyan, H. Wang, and J. Yao, 2019, “Multivariate Filter Estimation of Potential Output for the United States: Extension with Labor Market Hysteresis,” IMF Working Paper 19/35.

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• Alichi, A., R. Al-Mashat, H. Avetisyan, J. Benes, O. Bizimana, A. Butavyan, R. Ford, N. Ghazaryan, V. Grigoryan, M. Harutyunyan, A. Hovhannisyan, E. Hovhannisyan, H. Karapetyan, M. Kharaishvili, D. Laxton, A. Liqokeli, K. Matikyan, G. Minasyan, S. Mkhatrishvili, A. Nurbekyan, A. Orlov, B. Pashinyan, G. Petrosyan, Y. Rezepina, A. Shirkhanyan, T. Sopromadze, L. Torosyan, E. Vardanyan, H. Wang, and J. Yao, 2018, “Estimates of Potential Output and the Neutral Rate for the U.S. Economy,” IMF Working Paper No. 18/41.

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• Alichi, A., O. Bizimana, D. Laxton, K. Tanyeri, H. Wang, J. Yao, and F. Zhang, 2017, “Multivariate Filter Estimation of Potential Output for the United States,” IMF Working Paper No. 17/106.

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• Blagrave, P., R. Garcia-Saltos, D. Laxton, and F. Zhang, 2015, “A Simple Multivariate Filter for Estimating Potential Output, April, IMF Working Paper 15/79.

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• Benes, J., K. Clinton, R. Garcia-Saltos, M. Johnson, D. Laxton, P. Manchev and T. Matheson, “Estimating Potential Output with a Multivariate Filter,” IMF Working Paper 10/285 (December 2010).

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• Collyns, C., D. Laxton, and N. Tamirisa, 2008, “Measuring Output Gaps” Box 1.1 of Chapter 1 of the October 2008 World Economic Outlook, International Monetary Fund.

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• Laxton, Douglas, and Robert Tetlow, 1992, “A Simple Multivariate Filter for the Measurement of Potential Output,” Technical Report No. 59, (Ottawa: Bank of Canada), June.