A macroeconometric model for making effective policy decisions in the Republic of Azerbaijan

The objective of the study is building and using macroeconometric model which ensures analyzing and forecasting the (short run) impacts of various policy measures and external shocks, particularly changes in the oil price, foreign price and income on the Azerbaijani economy.Cointegration and Error Correction Modeling; General to Specific Modeling Strategy; Automatic Model Selection with Impulse Indicator SaturationsWe developed macroeconometric model with the objective of analyzing and forecasting the effects of various domestic policy measures and external shocks, particularly changes in oil price, world income on the Azerbaijani economy. It comprises 13 stochastic equations and 13 identities by covering the real, monetary, fiscal and external sectors of the Azerbaijan economy. The General to Specific Strategy is applied to the Cointegration and Error Correction Modeling in the empirical estimations over the quarterly period of 2000-2010. As we argue, the main contribution of our model is that since its stochastic equations contain information about the long-run relations, short-run dynamics and speed of adjustment from short-run deviation to long-run equilibrium, it has more power for policy analyzing and forecasting than the prior models built for the Azerbaijani economy.