Monetary and macroprudential policy in a commodity exporting economy: A structural model analysis

We build a structural small open economy model to examine the impact of monetary and macroprudential policy actions in a commodity exporting economy. The model incorporates labor market, credit market, macroprudential policy tools such as time-varying capital and reserve requirements, and shocks of FDI, commodity demand and commodity price. The model is estimated by Bayesian techniques using quarterly data for Mongolia in 2005e2017. The main results are (i) external and government spending shocks play important role on the business cycle fluctuations, (ii) capital and reserve requirements are more effective in curbing the credit growth (or changing bank lending rate), while the policy rate has stronger impact on inflation and exchange rate compared to the macroprudential tools, and (iii) combining macroeconomic and monetary policy measures is important in reducing welfare loss. These results suggest that synergies between monetary and macroprudential policy may ensure both macroeconomic and financial stability.


Adolfson, M., Laseen, S., Linde, J., Villani, M., 2008. Evaluating an estimated New Keynesian Small open economy model. J. Econ. Dynam. Contr. 32 (8), 2690e2721.

Aguirre, H., Blanco, E., 2015. Credit and Macroprudential Policy in an Emerging Economy: a Structural Model Assessment. BIS Working Paper No 504. Bank for International Settlements.

An, S., Schorfheide, F., 2007. Bayesian analysis of DSGE models. Econom. Rev. 26 (2e4), 113e172.

Angelini, P., Neri, S., Panetta, F., 2014. The interaction between capital requirements and monetary policy. J. Money Credit Bank. 46 (6), 1073e1112.

Areosa, W., Coelho, C., 2013. Using a DSGE Model to Assess the Macroeconomic Effects of Reserve Requirements in Brazil. Working Papers 330. Banco Central Do Brasil.

Baksa, D., Mihalyi, D., Romhanyi, B., 2017. Mongolia macro-fiscal Model: Model Guide. Unpublished manuscript. Natural Resource Governance Institute.

Brooks, S., Gelman, A., 1998. General methods for monitoring convergence of iter-ative simulations. J. Comput. Graph Stat. 7 (4), 434e455.

Calvo, G.A., 1983. Staggered prices in a utility-maximizing framework. J. Monetary Econ. 12 (3), 383e398.

Canova, F., 2007. Methods for Applied Macroeconomic Research. Princeton Uni-versity Press, Princeton.

Carletti, F., Hartmann, P., Spagnolo, G., 2007. Bank mergers, competition and liquidity. J. Money Credit Bank. 39 (5), 1067e1105.

Carvalho, F., Castro, M., 2017. Macroprudential policy transmission and interaction with fiscal and monetary policy in an emerging economy: a DSGE model for Brazil. Macroecon. Financ. Emerg. Market Econ. 10 (3), 215e259.

Chen, Y.-C., Rogoff, K., Rossi, B., 2008. Can Exchange Rates Forecast Commodity Prices? NBER Working Paper No. 13901 NBER, Cambridge, MA.

Christiano, L., Motto, R., Rostagno, M., 2010. Financial Factors in Economic Fluctu-ations. Working Paper Series No 1192/May2010. European Central Bank.

Christiano, L., Motto, R., Rostagno, M., 2014. Risk shocks. Am. Econ. Rev. 104 (1), 27e65.

Del Negro, M., Schorfheide, F., 2011. Bayesian macroeconometrics. In: Geweke, J., Koop, G., van Dijk, H. (Eds.), Handbook of Bayesian Econometrics. Oxford Uni-versity Press.

Del Negro, M., Schorfheide, F., 2013. DSGE model-based forecasting. In: Elliot, G., Timmerman, A. (Eds.), Handbook of Economic Forecasting, vol. 2A. North Holland, pp. 57e367.

Dutu, R., 2012. Business Cycle, Economic Policy and Forecasting: an Investigation into the Mongolian Economy Using a Bayesian-estimated DSGE Model. Un-published manuscript. Ministry of Finance of Mongolia website.

Erceg, C.J., Henderson, D.W., Levin, A.T., 2000. Optimal monetary policy with staggered wage and price contracts. J. Monetary Econ. 46 (2), 281e313.

Fernandez-Villaverde, J., 2010. The econometrics of DSGE models. SERIEs 1, 3e49. Galí, J., Smets, F., Wouters, R., 2011. Unemployment in an estimated new Keynesian model. NBER Macroecon. Annu. 26 (1), 329e360.

Gan-Ochir, D., 2016. Resolving High Interest Rate Puzzle in Mongolia. Working Paper, vol. 11. The Bank of Mongolia, pp. 31e63 (in Mongolian).

Gan-Ochir, D., Davaajargal, L., 2017. External shocks and business cycle fluctuations in Mongolia: evidence from a large Bayesian VAR. Money, Finance, Wealth J. 1 (1), 49e71 (in Mongolian).

Gan-Ochir, D., Dulamzaya, B., 2014. The Cost Channel of Monetary Transmission Mechanism: a Bayesian DSGE Approach. Working Paper, 9.2. The Bank of Mongolia, pp. 149e200 (In Mongolian).

Gan-Ochir, D., Kaliappa, K., 2016. Interest rate pass-through in Mongolia. Develop. Econ. 54 (4), 271e291.

Gerali, A., Neri, S., Sessa, L., Signoretti, F.M., 2010. Credit and banking in a DSGE model of the euro area. J. Money Credit Bank. 42 (1), 107e141.

Gertler, M., Karadi, P., 2011. A model of unconventional monetary policy. J. Monetary Econ. 58 (1), 17e34.

Gertler, M., Kiyotaki, N., 2011. Financial intermediation and credit policy in business cycle analysis. Chapter 11. In: Friedman, B.M., Woodford, M. (Eds.), Handbook of Monetary Economics, vol. 3A. Elsevier, pp. 547e599.

Gertler, M., Kiyotaki, N., 2015. Banking, liquidity, and bank runs in an infinite ho-rizon economy. Am. Econ. Rev. 105 (7), 2011e2043.

Greenwood, J., Hercowitz, Z., Huffman, G., 1988. Investment, capacity utilization and the real business cycle. Am. Econ. Rev. 78 (3), 402e417.

Guerron-Quintana, P., Nason, J., 2012. Bayesian Estimation of DSGE Models. Work-ing Papers, no. 12e14. Federal Reserve Bank of Philadelphia.

Henzel, S., Hülsewig, O., Mayer, E., Wollmersh€auser, T., 2009. The price puzzle revisited: can the cost channel explain a rise in inflation after a monetary policy shock? J. Macroecon. 31 (2), 268e289.

Hülsewig, O., Mayer, E., Wollmershauser,€ T., 2009. Bank behavior, incomplete interest rate pass- through, and the cost channel of monetary policy trans-mission. Econ. Modell. 26 (6), 1310e1327.

Ja€€askela,€ J., Nimark, K., 2011. A medium-scale New Keynesian open economy model of Australia. Econ. Rec. 87 (276), 11e36.

Justiniano, A., Preston, B., 2010a. Monetary policy and uncertainty in an empirical small open economy model. J. Appl. Econom. 25 (1), 93e128.

Justiniano, A., Preston, B., 2010b. Can structural small open-economy models ac- count for the influence of foreign disturbances? J. Int. Econ. 81 (1), 61e74. Kass, R.,

Raftery, A., 1995. Bayes factors. J. Am. Stat. Assoc. 90 (430), 773e795. Kiley, M., 2016.

Macroeconomic Modeling of Financial Frictions for Macroprudential Policy Making: a Review of Pressing Challenges. FEDS Notes, May 26, 2016. Maino, R.,

Imam, P., Ojima, Y., 2013. Macroprudential Policies for a Resource Rich Economy: the Case of Mongolia. IMF Working Paper WP/13/18. International Monetary Fund.

Munkhchimeg, S., Tsenguunjav, B., 2016. Living with volatilities: capital flows and their implications for central bank policies in Mongolia. Chapter 6. In: Becker, C. (Ed.), Living with Volatilities: Capital Flows and Policy Implications for SEACEN

Central Banks. The South East Asian Central Banks (SEACEN) Research and Training Centre, Kuala-Lumpur.

Nimark, K., 2009. A Structural model of Australia as s small open economy. Aust. Econ. Rev. 42 (1), 24e41.

Quint, D., Rabanal, P., 2014. Monetary and macroprudential in an estimated DSGE model of Euro Area. Int. J. Cent. Bank. 10 (2), 169e236.

Rabanal, P., 2007. Does inflation increase after a monetary policy tightening? An-swers based on an estimated DSGE model. J. Econ. Dynam. Contr. 31 (3), 1e20, pp. 906-937. 1.

Rees, D., Smith, P., Hall, J., 2016. A multi-sector model of the Australian economy. Econ. Rec. 92 (298), 374e408.

Smets, F., Wouters, R., 2003. An estimated dynamic stochastic general equilibrium model of the euro area. J. Eur. Econ. Assoc. 1 (5), 1123e1175.

Smets, F., Wouters, R., 2007. Shocks and frictions in us business cycle: a Bayesian DSGE approach. Am. Econ. Rev. 97 (3), 586e606.

Suh, H., 2012. Macroprudential Policy: its Effects and Relationship to Monetary Policy. Working Paper No. 12e28. Federal Reserve Bank of Philadelphia

Kaynak Göster