THE CORE OF A MACRO-ECONOMIC MODEL FOR ESTONIA Olivier Basdevant Ülo Kaasik Tallinn 2002 Working Papers of Eesti Pank No 6, 2002

This article presents a macro-econometric model for Estonia currently developed at the Bank of Estonia. It is based on a basic macro-economic framework that integrates both supply and demand side components. With this model we analyse the policy that should be implemented to maintain sustainable growth. The main emphasis is on the need to continue tough fiscal policy in order to maintain public deficit, as well as to avoid inflationary pressures and keep Estonia attractive to foreign investors.

Authors' e-mail addresses: olivier.basdevant@laposte.net, ykaasik@epbe.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

CONTENTS

Introduction

1. Methodology

1.1. General Principles

1.2. The Model

1.2.1. Inflation

1.2.2. The Role of Potential Output

1.2.3. Long-run Growth

1.3. Structural Change and the State-space Models

2. The Model Structure

2.1. Output Gap, Productivity and Capital Stock

2.1.1. Specification

2.1.1.1. First Step: Defining Signals

2.1.1.2. Second Step: State-space Model

2.1.2. Results

2.1.2.1. First Step

2.1.2.2. Second Step

2.2. Monetary sector

2.3. Labour Market

2.4. Real Sector

2.5. Balance of Payments

2.6. Government Operations

3. Simulation Results

3.1. Shock on Foreign Direct Investments

3.2. Increasing Foreign Demand

3.3. Increasing Foreign Prices

4. Conclusion

References

Annex 1. State-space models and the Kalman filter

Annex 2. List of variables

Annex 3. Model code

Annex 4. Estimations

The Core of a Macro-economic Model for Estonia, Working Papers of Eesti Pank, No 6, 2002 (PDF*)

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