The NEDA quarterly macroeconomic model: theoretical structure and some empirical results

This paper presents the National Economic and Development Authority’s (NEDA) quarterly macroeconomic model (QMM) of the Philippines and discusses the results of historical and policy simulations using the model. With its strict adherence to modern macroeconomic general equilibrium analysis, the current model deviates substantially from its predecessor. The core block is based on a general equilibrium macro-model with monopolistic competition à la Blanchard and Kiyotaki [1989] that allows the derivation of the domestic price level (PGDP) and aggregate output (GDP). The real and monetary/external sectors of the model are linked through an open economy is-lm aggregate demand framework, which embeds the portfolio balance approach to exchange rate determination; the model assumes a fully flexible exchange rate regime. The model distinguishes between domestic inflation, computed as the PGDP percent change and consumer price inflation (CPI) percent change. The latter is derived econometrically as the weighted average of domestic inflation and imported goods inflation. Expected inflation is assumed to be a weighted average of forward-looking and backward-looking expectations of individuals. The historical simulation results show the model’s adequate tracking ability. Fifteen policy experiments are presented in this paper. For each experiment, an exogenous/policy variable is changed to determine if it has a stagflationary, recessionary, or expansionary effect. The results for all experiments show that their effects on the price level and output conform to predictions of economic theory. The model is clearly a work-in-progress as yearly updates are required to maintain the model.