Policy analysis in real time using IMF's monetary model

We investigate to what extent estimated relationships of the IMF's monetary model and their policy implications are sample dependent. We observe that estimates of the model's key parameters and model-based measures of macroeconomic disequilibria are highly dependent on the data vintage employed. Changes in parameter estimates solely due to data revisions are found to be much smaller than those owing to parameter instability, possibly reflecting model misspecification. Moreover, instability in parameter estimates contributes to more uncertainty in assessments of macroeconomic disequilibria than data revisions. Analyses based on a version of the model in difference form are also found to be quite sensitive to the data vintage employed, although to a lesser extent than those based on the standard version of the model with variables in levels.

Research Highlights► The IMF's monetary model as been used for policy analysis for over 50 years. - Sensitivity of its policy implications to real-time data has not been investigated. ► We investigate sensitivity of model-based analyses to data revisions. ► Find key parameter estimates and policy analyses dependent on data vintage employed. - A major part due to model instability due to structural changes and misspecification. - Contribution of data revisions is relatively small but economically significant.