Solving Large Scale Models Under Alternative Policy Closures: The MSG2 Multi-Country Model

Abstract

This paper explores a number of issues in the design and use of the MSG2 multi-country model for policy simulation analysis. A brief overview of the MSG2 model is presented in Section 2. The use of large scale models with rational expectations such as the MSG2 model has required the development of new numerical algorithms. The solution algorithm that is used to solve the MSG2 model, as well as several other multi-country models including the G-Cubed model (seeMcKibbin and Wilcoxen (1995)), is summarized in Section 3. In Sections 4 and 5 the impact of alternative assumptions about fiscal and monetary closure rules are explored in more detail. In particular the standard assumptions used in the MSG2 model of a incremental interest payments rule for fiscal are compared to other assumptions frequently used in other global models such as a debt targeting rule and a fiscal conservatism rule. In addition, rules for monetary policy such as a fixed stock of money rule, a nominal income mle and an inflation target are compared. Both sets of policy closure assumptions are compared focusing on Australia but the insights generalize across the other countries in the model. It is shown that these assumptions can have some important implications for both the long run and short run impacts of fiscal and monetary policy. A summary is presented in Section 6.

The views expressed arethose of the authors and should not be interpreted as reflecting the views of the trustees. Officers or other staff of the Brookings Institution,or the Australian National University.