A Projection Model for Resource-rich and Dollarized Economy: The Democratic Republic of the Congo
AProjectionModelforResource-richandDollarizedEconomy TheDemocraticRepublicoftheCongo VictorMusa,BertrandGillesUmba,LewisMambo,JonasKibala,ChristianKandolo,JosephineMushiya,YannickLuvezo,JulesNsunda,GrégoireLumbala,YvesSiasi,SergeMfumukanda,LubakiAnge,KabataOlivier,LucShindano,DynaHeng,DiegoRodriguez-GuzmanandBarnaSzabo WP/24/126 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 JUN ©2024InternationalMonetaryFundWP/24/126 IMFWorkingPaper InstituteCapacityofDevelopment AProjectionModelforResource-richandDollarizedEconomy:TheDemocraticRepublicoftheCongo PreparedbyVictorMusa,BertrandGillesUmba,LewisMambo,JonasKibala,ChristianKandolo,JosephineMushiya,YannickLuvezo,JulesNsunda,GrégoireLumbala,YvesSiasi,SergeMfumukanda,LubakiAnge,KabataOlivier,LucShindano,DynaHeng,DiegoRodriguez-GuzmanandBarnaSzabo AuthorizedfordistributionbyNatanEpstein June2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Thepaperintroducesasemi-structuralQuarterlyProjectionModel(QPM)tailoredfortheDemocraticRepublicoftheCongo(DRC),highlightingitsresourcerichnessandhighdegreeofdollarization.Weprovideanoverviewofthemodel'sspecificationstoelucidatekeyfeaturesoftheDRCeconomyandpresentitsproperties,evaluatingitsalignmentwithDRCdataandassessingitsgoodnessoffit.Additionally,thepaperdemonstratestheQPM'spracticalapplicationthroughacounterfactualscenario,comparingpolicyrecommendationswiththeactualpolicyresponsesoftheCentralBankoftheRepublicofCongotoobservedexchangerateandinflationpressuresin2023.BeyondtheQPM,thepapershowcasessupplementarytoolsthatenhanceitsutilityforgeneratingmedium-termforecastsanddevelopiongnarrativesinsupportofmonetarypolicymaking.Specifically,weintroducetheNowcastingandNear-TermForecastmodels,designedtoassesstheeconomyinreal-timeandpredictshort-terminflationarytrends. JELClassificationNumbers: E47,E52,C54 Keywords: Resource-rich;Dollarization;Monetarypolicy;Inflation;ExchangeRatePolicies Author’sE-MailAddress: drodriguezguzman@imf.org;dheng@imf.org;barnaelek.szabo@gmail.com WORKINGPAPERS ProjectionModelforResource-richandDollarizedEconomy TheDemocraticRepublicoftheCongo PreparedbyVictorMusa,BertrandGillesUmba,LewisMambo,JonasKibala,ChristianKandolo,JosephineMushiya,YannickLuvezo,JulesNsunda,GrégoireLumbala,YvesSiasi,SergeMfumukanda,LubakiAnge,KabataOlivier,LucShindano,DynaHeng,DiegoRodriguez-GuzmanandBarnaSzabo1 1ICDtechnicalassistanceandcustomizedtrainingmissions,whichledtothedevelopmentofthismodel,wereprovidedtotheBanqueCentralduCongo(BCC)withintheprojectonBuildingCapacityinMonetaryPolicyModelingintheDRC.ThispaperbenefitedfromdiscussionswithstaffoftheBCCandtheIMFcountryteam.WearegratefulforcommentsfromN.E.Babiker,NEpstein,R.Portillo,M.Singh,andL.Zanna.TheviewsexpressedinthispaperarethoseoftheauthorsandnotnecessarilythoseoftheDRCauthorities,theInternationalMonetaryFund,oritsExecutiveBoard.WearealsogratefultoMs.ElisaManarinjaraforhersupportalongthepublicationprocedures. Contents Glossary3 ExecutiveSummary4 I.Introduction5 II.KeyCharacteristicsandMonetaryPolicyFrameworkoftheDRC6 III.AssessingtheDRC’sEconomyinReal-time9 A.InterpolatingQuarterlyGDPData9 B.NowcastingQuarterlyGDP12 C.InflationNearTermForecast14 IV.TheDRCQPMModel16 A.AggregateDemand:miningandnon-miningoutput16 B.AggregateSupply–RelativepricesandCPIdecomposition18 C.TheUncoveredInterestRateParityandForeignExchangeIntervention21 D.MonetaryPolicyReactionFunction22 E.TheFiscalBlock25 V.ModelCalibrationandDatabase26 A.Calibration26 B.TestDrivingtheModel27 VI.APolicy-RelevantExercise36 A.Assumptions36 B.TheResults37 VII.Conclusion38 Reference40 AnnexI.InterpolatingQuarterlyGDP42 AnnexII.Nowcasting42 AnnexIII.NearTermForecast44 AnnexIV.SummaryoftheDRCMODModel47 Glossary ARMA Auto-RegressionMovingAverage ARMAX Auto-RegressionMovingAveragewithExogenousVariables BCC BanqueCentralduCongo CPI ConsumerPriceIndex DFM DynamicFactorModel GDP GrossDomesticProduct FPAS ForecastingandPolicyAnalysisSystem MIDAS MixedFrequencyDataSampling NTF Near-termforecasting OLS OrdinaryLeastSquared U-MIDAS UnrestrictedMixedFrequencyDataSampling VAR VectorAuto-Regression VARX VectorAuto-RegressionwithExogenousVariables WEO WorldEconomicOutlook ExecutiveSummary Thepaperintroducesasemi-structuralQuarterlyProjectionModel(QPM)tailoredfortheDemocraticRepublicoftheCongo(DRC),highlightingitsresourcerichnessandhighdegreeofdollarization.Weprovideanoverviewofthemodel'sspecificationstoelucidatekeyfeaturesoftheDRCeconomyandpresentitsproperties,evaluatingitsalignmentwithDRCdataandassessingitsgoodnessoffit.Additionally,thepaperdemonstratestheQPM'spracticalapplicationthroughacounterfactualscenario,comparingpol
