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DSGE models for developing economies: an application to Morocco

Mohammed Ait Lahcen ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this thesis we try to understand the impact of some macroeconomic features of developing economies, in particular the existence of a large informal sector, on the reaction of these economies to different shocks. In order to achieve this objective, we derive a simple New Keynesian Small Open Economy DSGE model featuring multiple sectors with monopolistic competition, nominal rigidities in prices, a fixed exchange regime and the introduction of a simple medium-sized informal sector. We estimate the model with Bayesian estimation using quarterly data from Morocco. The model does a good job in capturing the unconditional second moments of the data. It is also able to replicate well some of the historical data series. Estimation results suggest a relatively weaker role of price rigidities in the non-tradables sector. It also suggests a much more aggressive reaction of the central bank to inflationary pressures with a relatively higher weight given to fluctuations in inflation compared with fluctuations in output and the real exchange rate. The study of the Bayesian impulse-response functions confirm the shock absorbing role of the informal sector for productivity shocks and pleads towards excluding imported inflation from the inflation target. However, no evidence is found of a shock absorbing role of the informal sector in the case of interest rate or foreign demand shocks.

Keywords: DSGE; developing economies; informality; small open economy; new-keynesian (search for similar items in EconPapers)
JEL-codes: E26 E31 E32 E37 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-dge and nep-iue
Date: 2014-08-29
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