Assessment of the parameters of dynamic stochastic general equilibrium model of Kazakhstan economy using Bayesian estimation

The transition of central banks to the inflation targeting policy has increased the importance to apply dynamic stochastic general equilibrium models (DSGE-models) for the assessment of social and economic effects of decisions, and to justify their efficiency quantitatively. The approach is known to be based on the Keynesian microeconomics that considers such market failures as imperfect competition, inflexible prices and imperfection of the labor market and uses the hypothesis of rational expectations. To assess the dynamic stochastic model parameters of general equilibrium the Bayesian estimation is widely used. The approach allows us to consider priori information about the estimated parameters and is especially useful in the conditions of short time series, as well as in the conditions of structural changes. Taking into consideration the above mentioned features a dynamic stochastic general equilibrium model of the economy of Kazakhstan is presented in the article using the Bayesian estimation of the model parameters. The model is a system of equations that describe the dynamics of national income, employment, demand for money, marginal costs relative to their equilibrium trajectories, as well as inflation and interest rates. The key equations of the system are the Euler equation and the IS-curve, describing the consumption dynamics; New Keynesian Phillips equation (NKPC) that connects the inflation dynamics and output gap; Taylor equation describing the interest rate policy of the monetary regulator, aimed at stabilizing the economy. Using the constructed DSGE-models we have assessed the effects on key macroeconomic indicators caused by demand shocks, prices (supply shocks), by changes in the interest rate policy of the monetary regulator and by changes in labour supply. The simulation results have revealed that the interest rate policy corresponding to the Taylor equation stabilizes the economy that is subjected to shocks of various types. The constructed model may be used for macroeconomic modeling and forecasting of the development dynamics of not only the economy of Kazakhstan, but also the economy of other post-Soviet countries. The assessment of the model parameters, we have made, may be used by central banks when optimizing the parameters of monetary and credit policy. The model may become the basis for the development of a comprehensive model of the Customs Union countries.