Economic models

Economic models are a simplified yet tractable description of the complex interlinkages that characterise modern economies. Models are able to capture the key economic relationships underpinning an economy, usually based on both theory and historical data, and thus serve to assist economists and policymakers in understanding the inner workings of the underlying economy.

Since economic models are simplifications of reality, no single model is meant to capture every feature of an economy. Instead, different models are suitable for different purposes. In view of this, the Bank maintains a suite of models, each with its relative strengths, enabling it to use the most appropriate model for specific applications, such as producing forecasts, carrying out simulations, and policy analysis. The main models in the Bank's toolkit are the following:

  • STREAM: an estimated, semi-structural model of the Maltese economy that is used routinely in the Bank's macroeconomic projection rounds, and is well-suited for providing detailed simulation results for a broad range of economic shocks.
  • MEDSEA: a calibrated, small open economy, dynamic stochastic general equilibrium (DSGE) model for Malta that is ideal for policy analysis, and can provide theoretically consistent simulation results.
  • MaCGE-MOD: a calibrated, multi-input, multi-output and multi-sectoral, computable general equilibrium (CGE) model of the Maltese economy that is useful for sectoral analysis of policies and shocks.
  • A dynamic factor model (DFM) that draws from a dataset of 38 variables, and can handle mixed frequencies and missing data, which is used for nowcasting and the short-term forecasting of real GDP.
  • A set of Bayesian vector autoregressions (BVARs) that vary in terms of the number of endogenous variables, which are primarily used to produce short-term forecasts of real GDP, the GDP deflator and the unemployment rate.

The Bank has other models in its toolkit, including a disaggregated short-term inflation forecasting model, a detailed fiscal forecasting framework, and several ad-hoc models.

The Bank is committed to continually expand its toolkit, particularly in light of advances in the field. Moreover, given the dynamic nature of modern economies, the Bank regularly revisits its existing stock of models to ensure they remain a faithful representation of the Maltese economy. This approach is beneficial on many fronts: it broadens the range of research possibilities, improves forecasting accuracy, and enhances our understanding of the domestic economy.