Testing and estimating a DSGE model via indirect inference: tackling the Dutch Disease in Kuwait

Azom, Emmanuel 2022. Testing and estimating a DSGE model via indirect inference: tackling the Dutch Disease in Kuwait. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

The economy of Kuwait has very distinct features when compared to other oil endowed economies. As an oil producer, Kuwait’s oil price volatility is a major determinant of the cyclical movements of macroeconomic aggregates in this economy. Thus, this thesis models a Real Business Cycle (RBC) model of Kuwait with an aim to match the cyclical movements of macroeconomic aggregates and describe the resource curse evident in the data. The Dynamic Stochastic General Equilibrium (DSGE) model of the economy is proposed and calibrated in Chapter 3. The model intuition showed that oil productivity shock is a major driver for aggregate fluctuations in this model. The results of model calibration showed that positive oil productivity shock expands oil and non-traded production whilst the non-oil sector declines. This RBC model can calibrate features of the data based on the assumptions it makes about the factor intensities across sectors and factor-price determination. In Chapter 4 and 5, we bring data to bear by testing the validity of our proposed model via Indirect Inference. Our choice of testing is backed up by the limitations surrounding the various econometric techniques and the underlying assumptions they make, especially the Bayesian technique. The debates surrounding the assumptions made about the model and priors chosen makes the Bayesian technique a difficult choice. It is because of these controversies surrounding priors, how true they are and how they inform us about the validity of our model, that make the case for it to be rejected. Thus, the indirect inference is chosen as it provides us with a strong econometric framework to test the model against the data without claims of certainty about the priors. In other words, we can restrict our model and bring it as close as possible to the data, hence making us able to make policy suggestions to deal with the Dutch Disease in Kuwait’s economy. Finally, from our estimated model, suggestions for policy makers to tackle the Dutch Disease via labour market regulations are made in Chapter 6. More so, they are also extended to show optimal fiscal policy behaviour of the government to boom-bust output movements caused by oil price volatility. These have considerable welfare e↵ects which are discussed for the variety of policies suggested.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General)
Uncontrolled Keywords:	1. DSGE Model 2. Kuwait model 3. Indirect inference 4. Dutch disease 5. Fiscal policy 6. Labour subsidy 7. Resource model 8. Oil sector model 9. Non-oil sector 10. Welfare analysis
Date of First Compliant Deposit:	24 March 2022
Last Modified:	24 Mar 2022 11:48
URI:	https://orca.cardiff.ac.uk/id/eprint/148609

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