EMMA - A QUARTERLY MODEL OF THE ESTONIAN ECONOMY Rasmus Kattai* October 2005 Working Papers of Eesti Pank No 12, 2005

This paper describes the first version of Eesti Pank's structural macro-econometric model EMMA. EMMA belongs to the second generation of macro models, with Neo-Classical supply determined long run properties and Keynesian demand driven short run adjustment.
The model has been designed for forecasting as well as for simulation exercises. In order to fulfil both tasks, the emphasis has been put on capturing the main characteristics of the Estonian economy.
The model describes a very small and open economy, in which long run economic growth and inflation are strongly influenced by real and nominal convergence towards EU15 levels.
JEL Code: C5, E12, E17
Key words: Estonia, macro model

*  I would like to thank Aurelijus Dabušinskas, John Lewis, David G. Mayes, Jaanika Meriküll, Martti Randveer, Ele Reiljan, Karsten Staehr and Andres Võrk for their comments and suggestions. The author takes the responsibility for any errors or omissions.

Author's e-mail address: rasmus.kattai@epbe.ee

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

Contents

1. Introduction

2. Theoretical Set Up of the Macro Model of the Estonian Economy

2.1. Demand Side of the Economy

2.2. Supply Side of the Economy

3. Underlying Assumptions for the Long Run Growth Path

3.1. Income Level Convergence

3.2. Prices and Nominal Convergence

4. Estimating and Setting up the Model

4.1. Data and Estimation Method

4.2. Structure of the Model

4.3. Real Sector

4.4. External Sector

4.5. Prices

4.6. Labour Market

4.7. Government Sector

4.8. Shock Simulations and Properties of the Model

5. Conclusions

References

Appendices

Appendix 1. List of Acronyms

Appendix 2. Equations of the Model

Appendix 3. Estonian Relative Price Level Compared to EU15

Appendix 4. Identities of the Model

Appendix 5. Responses to a Transitory Interest Rate Shock

Appendix 6. Responses to a Foreign Demand Shock

Appendix 7. Responses to an Oil Price Shock

EMMA - a Quarterly Model of the Estonian Economy, Working Papers of Eesti Pank No 12, 2005 (PDF*)

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