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 caseof inflation targeting policy and represents a system of 15 linearized equations for key macroeconomicindicators of the main economy sectors: households, enterprises, the National Bank, and the externalsector. The parameters were estimated by Bayesian methods for the period 2010-2018 and in the subperiod2015-2018. The advantage of the approach is the possibility of estimating parameters in shorttime series due to the use of prior information. From the estimates obtained, it follows that theNational Bank pays attention not only to inflation, but also to business activity and changes in theexchange rate. As is known from theory, the optimal policy for the monetary regulator may differ fromthe optimal one for society. To determine the parameters of the optimal monetary policy, the functionof social losses was derived and it was shown that, in addition to the traditional variables of the outputgap and inflation, the fluctuations in the interest rate and exchange rate should be its components. Thework takes into account some sources of welfare losses. These average annual losses of society areestimated at 3.2% of the equilibrium level of consumption. The optimization carried out according tothe current version of the DSGE-model allows us to draw the following conclusions. A “doublemandate” policy and the inclusion of an exchange rate in Taylor’s equation can increase publicwelfare. The sensitivity coefficients of the current interest rate policy can be revised upward, due towhich society losses can be reduced. When pursuing a monetary policy, one should focus not on theCPI, but on indicators of internal inflation, perhaps an indicator of core inflation and/or PPI.