MONETARY POLICY OPTIMIZATION BASED ON THE DSGE MODEL OF KAZAKHSTAN'S ECONOMY

Abstract

The model describes the economy in the short term (excluding investments), in the case of inflation targeting policy and represents a system of 15 linearized equations for key macroeconomic indicators of the main economy sectors: households, enterprises, the National Bank, and the external sector. The parameters were estimated by Bayesian methods for the period 2010-2018 and in the sub-period 2015-2018. The advantage of the approach is the possibility of estimating parameters in short time series due to the use of prior information. From the estimates obtained, it follows that the National Bank pays attention not only to inflation, but also to business activity and changes in the exchange rate. As is known from theory, the optimal policy for the monetary regulator may differ from the optimal one for society. To determine the parameters of the optimal monetary policy, the function of social losses was derived and it was shown that, in addition to the traditional variables of the output gap and inflation, the fluctuations in the interest rate and exchange rate should be its components. The work takes into account some sources of welfare losses. These average annual losses of society are estimated at 3.2% of the equilibrium level of consumption. The optimization carried out according to the current version of the DSGE-model allows us to draw the following conclusions. A “double mandate” policy and the inclusion of an exchange rate in Taylor’s equation can increase public welfare. The sensitivity coefficients of the current interest rate policy can be revised upward, due to which society losses can be reduced. When pursuing a monetary policy, one should focus not on the CPI, but on indicators of internal inflation, perhaps an indicator of core inflation and/or PPI.

Keywords

• dynamic stochastic general equilibrium models
• bayesian estimation
• inflation targeting