SIGMA: A New Open Economy Model for Policy Analysis

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Abstract
In this paper, we describe a new multi-country open economy SDGE model named SIGMA that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in open-economy policy simulations. We show that SIGMA's implications for the near-term (2-3 year) responses of key variables are generally similar to those of FRB/Global. Two features of our modeling framework, including rational expectations with learning, and the inclusion of some non-Ricardian agents, play an important role in giving SIGMA more flexibility to generate responses akin to the econometric policy model; nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework. These include linking model responses to underlying structural features of the economy, and fully articulating the endogenous channels through which imbalances arising from various shocks are alleviated.