Steady State Analysis of an Open Economy General Equilibrium Model for Brazil

1
Steady State Analysis of an Open Economy General
Equilibrium Model for Brazil

• Mirta Noemí Sataka Bugarin (Eco/UnB)
• Roberto de Goes Ellery Jr(Eco/UnB)
• Victor Gomes Silva(UCB/UnB)
• Marcelo Kfoury Muinhos (DEPEP/Bacen)

2
Objective

• Numerical characterization of steady state
  equilibrium for an open general equilibrium
  model, parameterized for the Brazilian economy.
• Quantify how monetary and fiscal policies affect
  the model economy long-run equilibrium.

3
Main feature of the Model economy

• Transaction technology, Ljungqvist and Sargent
  (2001), is introduced in order to obtain monetary
  equilibrium.
• Production included in the model economy.
• Small open economy.

4
Model set up

• Households

5
s.t. (2) 1 lt ht s(ct,,mt1/Pt)
In particular transaction technology takes the
form s(ct, mt1/Pt) ct 1/(1 mt1/Pt).
Given law law of motion for capital formation
as well as initial conditions (k0, m0, b0) gt 0,
assuming
6
Productive sector

• Competitive firms, competitive factors market
  and constant return to scale technology

7
Government

• Tax revenue
• Seignorage
• Debt financing

8
Government (cont.)

• Public expenses
• Assuming PPP holds, e(/R)P/P.
• Government budget constraint, all t 0

9
Allocation of resources

• Total production allocation
• Balance of Payment

10
Definition competitive general equilibrium
Sequences of
, such that given
(i) exogenous sequences for
and policy parameters, i.e.
(iii) the law of motion for assets
,
11

12
Strategy to compute GCE

• Formulate DPP.
• Derive Euler equations (set of necessary
  conditions) using differentiability property of
  Value Function.
• Obtain algebraic steady state solution for
  endogenous variables.
• Calibrate model economy with parameter values
  derived from observed economy.
• Compute numerical solution.

13
Parameterization
Parameters Values
Preferences ? 0.6 ? 0.96
Technology ? 0.05 ? 0.35 A 1
Fiscal and Monetary Policy ? 0.2 , 0.17
Long run relationships ? 0.079 ? 0.09 K/Y 1.73
Foreign Variables rf 5.03 P 1
14
Steady State Real Variables
Variable Value at Long Run Equilibrium
Capital Stock, k 3.1925
Aggregate Product, y 1.5012
Private Investment/Aggregate Output 0.1060
Real Wage 0.9758
Capital Real Rental Price 0.1646
15
Fig. 1 Aggregate Debt Output Ratios at
Alternative Steady States
16
Fig 2. Operational Deficit Output Ratio at
Alternative Steady States
17
Fig. 3 Domestic Debt Output Ratio at Alternative
Steady States
18
Fig. 4 Seignorage Revenue, Operational Deficit
and Aggregate Debt as Ratios to Aggregate Output
at Alternative Steady States
19
Fig 7 Tax rate, Interest Rate and D/Y
20
Fig. 8 Tax rate, Interest rate and Operational
Debt Output ratio.
21
Fig 9. Tax rate, Interest rate and Domestic debt
output ratio
22
Fig. 10 Seignorage, Operational Deficit and D/Y
23
Conclusion
1. Under adopted parameterization, an aggregate
D/Y ratio of 0.3387 is attained at the steady
state equilibrium. This equilibrium is supported
by a tax share on aggregate output of 17.87,
given a tax rate of 20 and a participation of
government expenses of about 17 in aggregate
output.
2. Simulation of alternative steady states has
shown a clear trade off between higher interest
rates (low inflation rates) and higher debt
output ratios in the long run.
Extension Extensions to analyze short run
dynamics of the system are under development.
Impulse responses to demand shocks (via monetary
policy interventions) and to supply shocks (via
exogenous productivity shocks) can be introduced
to compute a rational expectation competitive
equilibrium.