GTAP Resources: Resource Display
| GTAP Resource #7021 |
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"Food and energy crisis – inflation is back: real vs monetary CGE models" by Galindev, Ragchaasuren and Bernard Decaluwé Abstract The COVID-19 pandemic and the war in Ukraine has driven global food and energy prices up – inflation is back around the world. This paper compares the results of real and monetary CGE models that examine this. We find that the negative impact on output in the real model is larger in the monetary model as it does not allow for inflation. Galindev and Decaluwé (2022) develops a monetary CGE model in which a Tayler-type interest rate rule (e.g., Taylor, 1992) replaces the exogenous numeraire in the PEP-1-t model so that the model has inflation and absolute price. It is shown that a particular choice of the numeraire in the real model can be derived as a special case of the interest rate rule through a flexible parameterization. The nominal wage is fixed to represent nominal rigidities which is common in macroeconomic models. The shock is a one-period increase in the world prices of food and energy commodities. In the real model, the fixed nominal wage means more or less fixed real wage so that the labor supply curve completely elastic. In this case, the shock creates a severe decline in economy activities. In the monetary model, on the other hand, we find the following results. 1. The real model results are derived as a special case of the monetary model when a sufficiently high weight is placed on the gap in the Taylor rule corresponds to the chosen exogenous numeraire – either the consumption price index (CPI) or the nominal exchange rate. 2. The monetary model with the common Taylor rule allows for inflation. Given the fixed nominal wage, it leads to a decline in real wage which allows firms to higher more workers. As a result, the economic hardship is milder in the monetary model than in the real model. 3. The most interesting result is that when we shock the numeraire in the real model with the magnitude generated in the monetary model with common Taylor rule, the results of both models become identical. |
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- Model extension/development - Economic crisis |
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Public Access  Paper (409.9 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions “DRAFT: NOT FOR PUBLICATION” |
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Last Modified: 9/15/2023 2:05:45 PM
