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MAJA: A two-region DSGE model for Sweden and its main trading partners

Author

Listed:
  • Corbo, Vesna

    (Monetary Policy Department, Central Bank of Sweden)

  • Strid, Ingvar

    (Monetary Policy Department, Central Bank of Sweden)

Abstract
The Swedish economy is strongly dependent on global economic developments, which is reflected in generally strong empirical relationships between Swedish and foreign macroeconomic variables. It is, however, difficult for standard open-economy dynamic stochastic general equilibrium (DSGE) models to generate substantial cross-country spillovers; see e.g. the seminal paper of Justiniano and Preston (2010). We present a two-region DSGE model that better captures the dependence on global economic developments than previous models. It is estimated on data for Sweden and an aggregate of its main trading partners, the euro area and the United States, for the period 1995Q2.2018Q4. To capture the strong empirical relationships between Sweden and the foreign economy, we assume that global shocks to e.g. technology, real interest rates, financial risk, and firm and consumer sentiment directly affect both economies, while their impact on each economy may differ. We also allow for a flexible specification of the demand for Swedish exports to better account for the fluctuations in Swedish trade. Finally, headline and core inflation are distinguished by the introduction of consumption of energy goods, which allows for a more detailed and realistic analysis of inflation developments. This new model, named MAJA (Modell för Allmän JämviktsAnalys), is used by the Riksbank for interpretation of economic developments, forecasting, scenarios, and policy analysis. It builds on the work of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) and the Riksbank.s previous models, Ramses I and Ramses II (see Adolfson et al. (2007) and Adolfson et al. (2013), respectively).

Suggested Citation

  • Corbo, Vesna & Strid, Ingvar, 2020. "MAJA: A two-region DSGE model for Sweden and its main trading partners," Working Paper Series 391, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0391
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    References listed on IDEAS

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    2. Maih, Junior & Mazelis, Falk & Motto, Roberto & Ristiniemi, Annukka, 2021. "Asymmetric monetary policy rules for the euro area and the US," Journal of Macroeconomics, Elsevier, vol. 70(C).
    3. Di Casola, Paola & Stockhammar, Pär, 2021. "When domestic and foreign QE overlap: evidence from Sweden," Working Paper Series 404, Sveriges Riksbank (Central Bank of Sweden).
    4. André Marine Charlotte & Traficante Guido, 2021. "Forward Guidance in an Advanced Small Open Economy in the Effective Lower Bound," Working Papers 2021-16, Banco de México.
    5. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.
    6. de Walque, Gregory & Lejeune, Thomas & Rannenberg, Ansgar & Wouters, Raf, 2023. "Low pass-through and international synchronization in general equilibrium: Reassessing vertical integration," Journal of International Economics, Elsevier, vol. 140(C).
    7. Shahnazarian, Hovick, 2023. "Fiscal stabilization rule," Journal of Macroeconomics, Elsevier, vol. 77(C).
    8. Mazelis, Falk & Motto, Roberto & Ristiniemi, Annukka, 2023. "Monetary policy strategies for the euro area: optimal rules in the presence of the ELB," Working Paper Series 2797, European Central Bank.
    9. Fasolo, Angelo M. & Araujo, Eurilton & Jorge, Marcos Valli & Kornelius, Alexandre & Marinho, Leonardo Sousa Gomes, 2024. "Brazilian macroeconomic dynamics redux: Shocks, frictions, and unemployment in SAMBA model," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(2).
    10. Hernnäs, Sofia, 2023. "Automation when skills are bundled," Working Paper Series 2023:2, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    11. Corbo, Vesna & Di Casola, Paola, 2022. "Drivers of consumer prices and exchange rates in small open economies," Journal of International Money and Finance, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    DSGE model; Monetary Policy; Open economy; International spillovers; Bayesian estimation.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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