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This paper estimates a standard Dynamic Stochastic General Equilibrium (DSGE) model that includes a wage and price Phillip's curves with different expectation formation processes for Brazil and the USA. Other than the standard rational expectation process, we also use a limited rationality process, the adaptive learning model. In this context, we show that the separate inclusion of a labor market in the model helps to anchor inflation even in a situation of adaptive expectations, a positive output gap and inflation above target. The estimation results show that the adaptive learning model does a better job in fitting the data in both Brazil and the USA. In addition, the estimation shows that expectations are more backward-looking and started to drift away sooner in 2021 in Brazil than in the USA. We then conduct optimal policy exercises that prescribe early monetary policy tightening in the context of positive output gaps and inflation far above the central bank target.

Macroeconomics --- Economics: General --- Inflation --- Labor --- Production and Operations Management --- Banks and Banking --- Macroeconomics: Consumption, Saving, Production, Employment, and Investment: General (includes Measurement and Data) --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Monetary Policy --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Mobility, Unemployment, and Vacancies: General --- Price Level --- Deflation --- Macroeconomics: Production --- Wages, Compensation, and Labor Costs: General --- Wage Level and Structure --- Wage Differentials --- Interest Rates: Determination, Term Structure, and Effects --- Economic & financial crises & disasters --- Economics of specific sectors --- Labour --- income economics --- Banking --- Financial crises --- Economic sectors --- Prices --- Output gap --- Production --- Real wages --- Wage gap --- Central bank policy rate --- Financial services --- Currency crises --- Informal sector --- Economics --- Wages --- Economic theory --- Interest rates --- Brazil

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Adverse demographics and other structural weaknesses impinge on Korea’s long-term fiscal outlook and potential growth. Moreover, inadequate social protection is creating poverty and dampening consumption. The paper presents projections of Korea’s fiscal outlook, using new estimates of potential growth obtained with a novel multivariate filter. It shows that keeping fiscal revenues-to-GDP constant would result in an explosive public debt dynamic in the long term. Then, through simulations of the Flexible System of Global Models, the paper analyzes policies to preserve fiscal sustainability, while boosting potential growth and social protection. It concludes that with greater revenue mobilization, Korea can stabilize debt-to-GDP well below “dangerous” levels. Policies to address Korea’s challenges include higher targeted transfers to the most vulnerable and fiscal measures to support female labor force participation and employment, accompanied by product and labor market reforms.

Public Finance --- Production and Operations Management --- General Aggregative Models: Keynes --- Keynesian --- Post-Keynesian --- General Aggregative Models: Forecasting and Simulation --- Fiscal Policy --- National Government Expenditures and Welfare Programs --- Social Security and Public Pensions --- Debt --- Debt Management --- Sovereign Debt --- Macroeconomics: Production --- National Government Expenditures and Related Policies: General --- Public finance & taxation --- Macroeconomics --- Public debt --- Fiscal policy --- Potential output --- Expenditure --- Productivity --- Production --- Debts, Public --- Economic theory --- Expenditures, Public --- Industrial productivity --- Korea, Republic of

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Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank’s mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

Monetary policy --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Banks and Banking --- Finance: General --- Inflation --- Money and Monetary Policy --- Production and Operations Management --- Price Level --- Deflation --- Prices, Business Fluctuations, and Cycles: Other --- Monetary Policy --- Fiscal Policy --- Interest Rates: Determination, Term Structure, and Effects --- Macroeconomics: Production --- General Financial Markets: Government Policy and Regulation --- Banking --- Monetary economics --- Macroeconomics --- Finance --- Central bank policy rate --- Inflation targeting --- Output gap --- Financial sector stability --- Financial services --- Prices --- Production --- Financial sector policy and analysis --- Interest rates --- Economic theory --- Financial services industry --- Korea, Republic of

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Estimates of potential output are an important component of a structured forecasting and policy analysis system. Using information on capacity utilization, this paper extends the multivariate filter developed by Laxton and Tetlow (1992) and modified by Benes and others (2010), Blagrave and others (2015), and Alichi and others (2015). We show that, although still fairly uncertain, the real-time estimates from this approach are more accurate than estimates constructed from naïve univariate statistical filters. The paper presents illustrative estimates for the United States and discusses how the end-of-sample estimates can be improved with additional information.

Macroeconomics. --- Macroeconomic policy making. --- Macroeconomics --- Economics --- Econometric models. --- Mathematical models. --- Inflation --- Production and Operations Management --- Model Construction and Estimation --- Price Level --- Deflation --- Monetary Policy --- Macroeconomics: Production --- Financial Crises --- Economic & financial crises & disasters --- Potential output --- Output gap --- Capacity utilization --- Global financial crisis of 2008-2009 --- Production --- Prices --- Financial crises --- Economic theory --- Industrial capacity --- Global Financial Crisis, 2008-2009 --- United States

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Many central banks in emerging and advanced economies have adopted an inflation-forecast targeting (IFT) approach to monetary policy, in order to successfully establish a stable, low-inflation environment. To support policy making, each has developed a structured system of forecasting and policy analysis appropriate to its needs. A common component is a model-based forecast with an endogenous policy interest rate path. The approach is characterized, among other things, by transparent communications—some IFT central banks go so far as to publish their policy interest rate projection. Some elements of this regime, although a work still in progress, are worthy of consideration by central banks that have not yet officially adopted full-fledged inflation targeting.

Anti-inflationary policies. --- Inflation (Finance) -- Econometric models. --- Inflation (Finance) -- Forecasting. --- Monetary policy -- Econometric models. --- Banks and Banking --- Inflation --- Money and Monetary Policy --- Production and Operations Management --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Price Level --- Deflation --- Central Banks and Their Policies --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Policy --- Macroeconomics: Production --- Macroeconomics --- Banking --- Monetary economics --- Finance --- Central bank policy rate --- Inflation targeting --- Output gap --- Prices --- Financial services --- Monetary policy --- Production --- Real interest rates --- Banks and banking --- Interest rates --- Economic theory --- Canada