5. What Can Macroeconometric Models Say About Asia-Type Crises?
The title of this chapter is the same as the title of a paper that can be read or downloaded from this site: What Can Macroeconometric Models Say About Asia-Type Crises?. You should read this paper before reading this chapter. The paper uses the MC2 model to analyze Asia-type crises. The four experiments in this paper can be duplicated on this site. This is explained in Chapter 3 of the MC2 Model Workbook. These experiments can also be performed using the MC3 model. The steps for the first experiment, the exchange rate experiment for Thailand, are:
  1. Click "Solve" under "MC3 Model" in the left menu and copy MC3BASE to a dataset you have named.
  2. Click "Set prediction period" and set the period to be 1992 through 1996.
  3. Click "Use historical errors" and set the option to use the historical errors.
  4. Click "Drop or add equations" and drop the RS equation for the United States (equation 30).
  5. Click "Change exogenous variables" and ask to change E for Thailand. Then say to multiply each existing value by 1.30. Be sure to save the changes once you are done.
  6. Click "Solve the model and examine the results".

Once the model is solved you can examine the results. You can then compare these results using the MC3 model with those in the paper using the MC2 model.

The notation on the website for the variables presented in Table 2 of the paper is: consumption (C), exports (EX), investment (I), imports (IM), import price level (PM), export price level in local currency (PX), export price level in dollars (PX$), domestic price level (PY), current account as a percent of nominal potential output (SPCT), and output (Y).

The other three experiment in Table 2 of the paper can be run by starting over (with a new dataset) and following the above steps, where E is changed for the country of interest. (For the Philippines and Korea, you also need to drop the exchange rate equation for the country before changing E.) Other exogenous variables can also be easily changed.

This experiment is useful for seeing the effects of exchange rate changes in the model. It should be kept in mind, however, that the estimated equations for countries like Thailand, Malaysia, the Philippines, and Korea are not likely to be as accurate as equations for more developed countries, and so the results should be interpreted with considerable caution. The exchange rate experiments are probably pushing the limits of the model's credibility.

The use of the historical errors is important. This allows the perfect tracking solution to be the base path, from which changes can then be made. If you did not use the historical errors, you would have to first create a base path of predicted values, which the new predicted path (after the interest rate changes) would be compared. See Section 2.6 of The US Model Workbook for more discussion of this.