A Medium-Scale Bayesian DSGE Model for Kazakhstan with Incomplete Exchange Rate Pass-Through

Abstract

This paper analyzes the sources of business cycle fluctuations in Kazakhstan and the relevance of various frictions in the economy using a medium-scale DSGE model with imperfect exchange rate pass-through. We estimate the model via Bayesian methods and present estimates of structural parameters of the model and highlight the role of various shocks in explaining the actual dynamics of observed variables. In the absence of quality and deseasonalized data, we show that the DSGE model with time-varying markups possesses a reasonable level of accuracy as the one-sided Kalman filter predictions match the dynamics of the observable variables. Posterior estimates of the model show that the long-run growth rate of output is 4.5% per annum and the exchange rate pass-through to domestic prices is between 21% and 35% within a quarter. We also find that risk premium shocks have played an important role in determining the inflation rate, the interest rate and the real exchange rate in the economy since 2015.

Keywords:

• DSGE model
• incomplete exchange rate pass-through
• Bayesian estimation
• emerging economy
• Kazakhstan

JEL CLASSIFICATIONS:

• C11
• E30
• E32
• E37

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 As in Adolfson et al. (2007), we use the Calvo setup to model employment since it responds to shocks more slowly than aggregate hours of work. Therefore, we assume that a certain fraction (${\xi }_e$) of firms cannot reoptimize the number of workers every period.

Additional information

Notes on contributors

N. Abilov

N. Abilov specializes in time-series econometrics, Bayesian methods and macroeconomic theory. He holds MSc degree in Financial Economics from the Higher School of Economics (Moscow) and Graduate Degree in Mathematics from the University of London. Nurdaulet is the head of macroeconomic research division at NAC Analytica (Nazarbayev Univeristy, Nur-Sultan). Prior to joining to NAC Analytica he did his research in financial econometrics at the Higher School of Economics in Moscow. During the last years he has switched his areas of interest to Bayesian estimation of DSGE models and applications of factor models in macroeconomics.