IMFS-CEPR Research Meeting

New Methods for Macroeconomic Modelling, Model Comparison and Policy Analysis

April 5-6, 2016
Goethe University Frankfurt
Campus Westend

Volker Wieland and Robert Tetlow
Michael Kumhof


How is macromodelling useful for policy advice? At the research meeting as the first part of the 2016 edition of the IMFS Conference on Monetary and Financial Stability economists from international organizations, central banks and universities looked at „New Methods for Macroeconomic Modelling, Model Comparison and Policy Analysis“ from different points of view.

As a starting point, Robert Tetlow and Werner Röger showed how macromodelling is used in the Federal Reserve Board and the European Commission. Tetlow who is an Advisor at the Division of Monetary Affairs at the Board of Governors of the Federal Reserve System warned policymakers and advisors to be humble. “Despite large advances in recent years policy prescriptions of modern models are as fragile as ever,” he said. “It is difficult to judge whether one model is better than the other”. Comparing the role of the policy advisor and his linear rational expectation models to Hollywood movies he found various similarities: It starts with a shock, then the hero arrives and there is always a happy ending. However, Tetlow points out the importance of uncertainty regarding the data, the parameters and the models. Using the FRB/US model, the Board staff presents prescriptions of simple policy rules like the Taylor rule, Tetlow explained. In his view, simplicity matters. Therefore, Tetlow appealed to take a quantitative central tendency path for policy and target variables and then explicitly consider the uncertainty. “But you always have to consider how to communicate it to the public,” he concluded.

Werner Röger of the Directorate General Economic and Financial Affairs described how the European Commission had made a detour in macromodelling. “At the beginning of the crisis we have made our models more complicated, now we are going back to simpler models,” he said. At the EC, macromodelling encompasses a wide range of applications like fiscal policy as well as regulatory measures, evaluation of the impact of structural reforms and estimates of potential output and output gaps. Based on the EC’s QUEST3 model and various extensions, Roeger analyzed different views about the sources of the long slump in the euro area. “What would be the shocks to generate such a slump?” Roeger asked. Comparing restrictive fiscal policy, household deleveraging, financial constraints for investors and reduced productivity growth, Roeger identified total factor productivity (TFP) and investment wedges as important for the decline of GDP growth in the euro area.

For Michael Kumhof, Senior Research Advisor at the Bank of England, banks are not intermediaries of loanable funds. In his view the financing process leads to the digital creation of monetary purchasing power. “Funds first exist in the mind of the banker,” Kumhof explained. “They then materialize digitally along with the loan”. Thus, according to Kumhof macroprudential and monetary policy frameworks should be reevaluated using financing models of banking like the Bank of England has already started doing.

Based on Kumhof’s theory, Joannes Mongardini, Deputy Division Chief at the International Monetary Fund, stressed the role of banks as ways of leveraging the economy. “Banks play a critical role because they decide whether clients have a good or bad investment,” he said. As he captures the role of banks as leverage machines with a MAPMOD model Mongardini comes to the conclusion that the behavior of banks is highly non-linear which leads to boom-bust cycles.

Building a bridge between model comparison and policy making, Massimo Rostagno, Director of Monetary Policy at the European Central Bank, presented causes of inertia in monetary policy and the consequences. As a means of making model and policy comparison easy, Volker Wieland, Managing Director of the IMFS, outlined the features of the Macroeconomic Model Data Base (MMB). Based on this computational platform and its systematic approach, researchers can include new models, compare competing models and make robust policy recommendations.

Furthermore, in parallel sessions, researchers analyzed credit, banking and monetary policy, looking at questions of global banking, trade, financial globalization and the slow recovery after the financial crisis. The model-based assessments of fiscal policy were in the center of another session, focusing on fiscal multipliers, a narrative approach to a fiscal DSGE model and a simulation-based approach to the macroeconomic effects of the euro area’s fiscal consolidation. Questions of estimation and forecasting were also addressed in a session whereas aspects of financial frictions, open economies and policy effects were covered in a parallel discussion.


Program (PDF)

April 5, 2016

1:00 – 2:00 pm

Registration and Coffee

2:00 – 2:10 pm


2:10 – 3:15 pm

Session 1: Macroeconomic Modelling and Policy Making

Chair: Volker Wieland (IMFS)

Macroeconomic Modelling, Model Uncertainty and Policy Advice
Robert Tetlow (Federal Reserve Board)

Macroeconomic Modelling: From the Financial Crisis to the Long Slump in the Euro Area
Werner Röger (European Commission)

3:15 – 3:45 pm

Coffee Break

3:45 – 6:00 pm

Parallel Session 1a: Credit, Banking and Monetary Policy

Chair: Michael Binder (IMFS)

Global Banking, Trade, and the International Transmission of the Great Recession
Zeno Enders (University of Heidelberg); Alexandra Peter

Discussant: Elena Afanasyeva (IMFS)

Financial Globalisation, Monetary Policy Spillovers and Macro-Modelling: Tales from One Hundred and One Shocks
Georgios Georgiadis; Martina Jancokova (European Central Bank)

Discussant: Falk Mazelis (Humboldt University Berlin)

Learning About Banks' Net Worth and the Slow Recovery after the Financial Crisis
Michael Kühl; Josef Hollmayr (Deutsche Bundesbank)

Discussant: Peter Karadi (European Central Bank)

Parallel Session 1b: Model-based Assessments of Fiscal Policy

Chair: Gernot Müller (University of Tübingen)

Comparing Fiscal Multipliers across Models and Countries in Europe
Sebastian Schmidt (European Central Bank) et al.

Discussant: Benjamin Born (University of Bonn)

A Narrative Approach to a Fiscal DSGE Model
Thorsten Drautzburg (Federal Reserve Bank of Philadelphia)

The Macroeconomic Effects of the Euro Area's Fiscal Consolidation 2011-2013: A Simulation-based Approach
Jan Strásky (Organisation for Economic Co-operation and Development); Ansgar Rannenberg; Christian Schoder


April 6, 2016

8:15 – 8:45 am


8:45 – 10:15 am

Session 2: Macroeconomic Implications of the Financial Sector

Chair: Volker Wieland (IMFS)

Banks are not Intermediaries of Loanable Funds – And Why This Matters
Michael Kumhof (Bank of England)

Discussant: Stefano Neri (Banca d'Italia)

Designing Models for Macroprudential Policy Analysis
Joannes Mongardini (International Monetary Fund)

Discussant: Gianni Lombardo (Bank for International Settlements)

10:15 – 10:45 am Coffee break

10:45 – 1:00 pm

Parallel Session 2a: Model Solution, Estimation, and Forecasting

Chair: Gernot Müller (University of Tübingen)

Marginalized Predictive Likelihood Comparisons of Linear Gaussian State-Space Models with Applications to DSGE, DSGE-VAR, and VAR Models
Anders Warne (European Central Bank); Kai Christoffel; Günter Coenen

Discussant: Johannes Pfeifer (University of Mannheim)

Testing Macro Models by Indirect Inference: A Survey for Users
Michael Wickens (University of York) et al.

Discussant: Ana Galvao (Warwick Business School)

A Generalized Approach to Indeterminacy in Linear Rational Expectations Models
Giovanni Nicoló (UCLA); Francesco Bianchi (Cornell University)

Discussant: Michael Evers (Goethe University Frankfurt)

A Tractable Framework for Analyzing a Class of Nonstationary Markov Models
Inna Tsener (University of the Balearic Islands); Lilia Maliar; Serguei Maliar; John Taylor

Parallel Session 2b: Financial Frictions, Open Economies, Policy Effects

Chair: Volker Wieland (IMFS)

Macroeconomic and Financial Dynamics in Small Open Economies
Markus Kirchner (Central Bank of Chile); Javier García-Cicco

Discussant: Yuliya Rychalovska (National Bank of Belgium)

Countercyclical Capital Regulation in a Small Open Economy DSGE Model
Matija Lozej (Central Bank of Ireland); Luca Onorante; Ansgar Rannenberg

Discussant: Daragh Clancy (European Stability Mechanism)

Financial Fragility and the Fiscal Multiplier
Sweder van Wijnbergen (University of Amsterdam)

Discussant: Felix Strobel (Humboldt University Berlin)


1:00 – 2:30 pm


2:30 – 4:00 pm

Session 3: Model Comparison and Policy Making

Chair: Michael Binder (IMFS)

On Monetary Policy Inertia: Causes and Consequences
Massimo Rostagno (European Central Bank)

News Methods for Macro-Financial Model Comparison and Policy Analysis
Volker Wieland (IMFS)

4:00 – 4:30 pm

Coffee break

4:30 – 6:00 pm

Steering Group Meeting


Typically, 25 minutes will be reserved for paper presentations, 10 minutes for the discussant, and 10 minutes for general discussion.