Money, Banks and Finance in Economic Thought

Macroeconometric modelling at the International Monetary Fund (1998-2008): From MULTIMOD Mark III to GEM

Sergi Francesco, University of the West of England Bristol

This paper investigates the development between 2001 and 2004 of a macroeconometric model (named “Global Economy Model”, GEM) within the Research department of the International Monetary Fund (IMF). The development of the GEM aimed at "improv[ing] the Fund policy analysis" by "using recent economic research based on explicit microeconomic framework" (Bayoumi, 2004, 1). The GEM was indeed expected to replace the “MULTI-region econometric MODel” (MULTIMOD) Mark III (Laxton et al. 1998), the last model in a lineage of similar "Keynesian" macroeconometric models introduced at the Fund in the 1970s (Boughton, 2001). By contrast, the GEM represented the first model in a lineage of dynamic stochastic general equilibrium (DSGE) models. The development of the GEM coincided indeed with the rise of the DSGE approach, or the "new neoclassical synthesis" as it is also called both by macroeconomists (e.g. Goodfriend and King, 1997) and historians (e.g. De Vroey and Duarte, 2013). The existing historical accounts covered the academic literature of the "new synthesis", making clear the theoretical and methodological transformation that it entailed. Much less is known about how this approach was implemented within the policy-making and policy-advice process of national and international institutions. This paper investigates this issue, taking the GEM as a case study. It also shows how the development of the GEM played a key role in the spreading of DSGE models across policy-making institutions. The building of the GEM gathered indeed a wide community of modellers, which acted then as a network for the development of DSGE models in other institutions. The paper presents the theoretical content, the methodology, and the empirical methods of the GEM; then it compares these characteristics with those of the MULTIMOD III. This comparison focuses especially on the ways to approach international trade, international financial markets, and the international transmission mechanisms of monetary policy. These features have been so far overlooked by the historical literature on the "new synthesis". Therefore, the contribution of this paper is to suggest that dealing with "open economy" issues has been precisely the key for the widespread adoption of DSGE models for policy analysis by institutions like the IMF. References Bayoumi, T. A. 2004. GEM. A New International Macroeconomic Model. IMF Occasional Paper, nr. 239. Boughton, J.. 2001. The Silent Revolution. The International Monetary Fund 1979-1989. Washington DC: IMF. De Vroey, M. and P. G. Duarte. 2013. In search of lost time: The neoclassical synthesis. The BE Journal of Macroeconomics 13(1): 965-995. Goodfriend, M. and R. King. 1997. The New Neoclassical Synthesis and the Role of Monetary Policy. NBER Macroeconomics Annual, 231-283. Laxton, D., P. Isard, H. Faruqee, E. Prasad, and B. Turtelboom. 1998. MULTIMOD Mark III. The Core Dynamic and Steady-State Models. IMF Occasional Paper, nr. 164.

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Keywords: DSGE models; History of macroeconomics; International Monetary Fund; International macroeconomics; Macroeconometric modelling