^*Douglas Laxton is assistant to the director of the IMF Research Department. The author thanks all the people involved in the development of the Global Economy Model (GEM) and the IMF's other DSGE models. We owe a great debt to Ken Rogoff for inviting Paolo Pesenti to the IMF and focusing our attention on getting the job done quickly. We also thank Raghuram Rajan, Simon Johnson, and others for making further development of these types of models a priority and supporting outreach efforts in creating a DSGE modeling network. Finally, we acknowledge the invaluable help from Laura Leon in preparing the paper and Peter Hollinger, Michel Juillard, Dirk Muir, and Susanna Mursula in developing procedures used in model simulations. Thanks as well to our Econometric Support Team who have helped with training and getting the models used. Finally, we appreciate comments from Robert Flood, Peter Hollinger, and Turgut Kisinbay on an earlier draft.

Abstract

This paper provides a nontechnical introduction to the IMF's Global Economy Model (GEM). GEM is a modern dynamic stochastic general equilibrium (DSGE) model that has been designed for studying a range of issues that cannot be adequately addressed with reduced-form econometric models or an earlier generation of macromodels whose dynamic equations were not based on strong choice-theoretic foundations. Unlike earlier models, which were viewed as black boxes by many outsiders, GEM's theoretical structure is much better connected with work in the academic community, making it considerably easier for outside researchers to apply it and extend it for their own work. To understand the basic philosophy behind GEM, we start by using the issue of exchange rate pass-through to understand how adding additional features to the model allows one to better understand issues related to the magnitude of exchange rate pass-through. We then provide a nontechnical introduction to what needs to be known to develop a steady-state calibration of the model. Finally, we end by summarizing other work on DSGE modeling at the IMF and lay out a few major priorities for the future.