Original scientific paper
https://doi.org/10.1080/1331677X.2020.1757480
Monetary policy, financial frictions and structural changes in Uganda: a Markov-switching DSGE approach
Francis Leni Anguyo
Rangan Gupta
Kevin Kotzé
Abstract
This paper considers the use of regime-switching dynamic stochastic
general equilibrium models for monetary policy analysis
and forecasting purposes. The objective is to determine whether
or not the inclusion of these regime-switching features provide a
more accurate description of the economy in a particular low
income country. All of the models incorporate financial frictions
that are introduced through the activities of heterogeneous
agents in the household and several other features that are incorporated
in most small open-economy models. Two variants of
regime-switching models are considered: one includes switching
in the monetary policy rule (only) and the other employs switching
in both the monetary policy rule and the volatility of the
shocks. The models are applied to the quarterly macroeconomic
data for Uganda and most of the parameters are estimated with
the aid of Bayesian techniques. The results of the extensive inand
out-of-sample evaluation suggest that the model parameters
do not remain constant over the two regimes. In addition, the
transition probabilities suggest that there are three distinct periods
where the central bank response has been more aggressive.
These periods relate to a change in policy framework and significant
shocks that have affected the Ugandan economy. It is also
noted that the forecasting performance of the regime-switching
models are possibly superior to the model that excludes these
features over certain horizons.
Keywords
Monetary policy; inflationtargeting; financial frictions; small open-economy; low income country; dynamic stochastic general equilibrium model; Bayesian estimation
Hrčak ID:
254462
URI
Publication date:
9.2.2021.
Visits: 956 *