Palgrave Handbook of Econometrics: Applied Econometrics

Gunnar Bårdsen and Ragnar Nymoen 889

2003

–4

–2

0

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2004 2005 2006

(a) Consumer price inflation (b) Unemployment rate (c) Wage growth

(d) GDP growth

(g) Money market interest rate (h) Real credit growth (i) Currency depreciation rate

(e) Import price inflation (f) Real exchange rate

–5 2003

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2004 2005 2006

2003

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2004 2005 2006 –2 2003

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2003

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2004 2005 2006 2003

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(^2003200420052006)
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–2 2003 2004 2005 2006
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Figure 17.6 Dynamic simulation of NAM 2003(1)–2007(1)
Actual values are indicated by solid lines, and model solution by dashed lines. The distance between the
two dotted lines represents 95% prediction intervals. The units on all the vertical axes are percentage
points, and time is along the horizontal axes.
(a)–(f), reports the dynamic multipliers for inflation, wage increases, the rate of
unemployment, GDP growth, the increases in the import price index, and the rate
of currency depreciation. Since all variables in the graph are measured in percentage
points, the multipliers shown are absolute deviations from the baseline. In the same
way as in Figure 17.5, parameter uncertainties are indicated by the dotted lines,
representing 95% confidence intervals.
Since it is a temporary shock to foreign inflation, there is no reason to expect a
permanently lower rate of domestic inflation. Panels (a) and (c) of Figure 17.7 con-
firm that presumption, but also show that the initial multipliers of price and wage
inflation are negative and significant. Part of the adjustment to a lower nominal
path of the economy involves a higher unemployment rate and lower GDP growth
(cf. panels (b) and (d)), which are explained by the initial appreciation of the real
exchange rate. The nominal depreciation in panel (f), due to a lower domestic inter-
est rate (not shown), is not enough to offset the loss of competitiveness, initiated
by the deflationary price shock.
The nominal rigidities in the model, which transform the nominal shock into
a change in the real exchange rate, are an important property in explaining the