For macro-economic assessment, SGC uses the NiGEM model of the British National Institute of Economic and Social Research is an estimated model, which uses a ‘New-Keynesian’ framework in that agents are presumed to be forward-looking but nominal rigidities slow the process of adjustment to external events.
NIGEM is also designed to be flexible where assumption on behavior and policy can be changed. Agents can be assumed to look forward in some scenarios, but not in others. Financial markets are normally assumed to look forward and consumers are normally assumed to be myopic but react to changes in their (forward looking) financial wealth. Monetary policy is set according to rules, with defaults designed for speed. However, interest rate feedback rules can be changed, and their parameters adjusted.
The structure of the NIGEM is designed to correspond to macroeconomic policy needs. NIGEM is a structured around the national income identity, can accommodate forward looking consumer behavior and has many of the characteristics of a Dynamic Stochastic General Equilibrium (DSGE) model. Unlike a pure DSGE model, NiGEM is based on estimation using historical data. It thus strikes a balance between theory and data and enables using the NIGEM both for policy analysis and forecasting.
The core of each of these country models consists of a production function determining output in the long term; a wage-price block; a description of the government sector; consumption, personal income and wealth; international trade; and financial markets. We use a dynamic error-correction structure on the estimated equations, which allows the model to adjust gradually towards equilibrium in response to a shock. In some cases the speed of adjustment will depend on expectations as well as distance from equilibrium.
Linkages in NIGEM take place through trade and competitiveness, interacting financial markets and international stocks of assets. The model is homogeneous in exchange rates, and exports demand equals imports across the world. Competitiveness acts as an important stabilizing feedback on the model, as shifts in the domestic price level or the exchange rate feed into relative trade prices, allowing net trade to offset shifts in domestic demand.