Dynamic Stochastic General Equilibrium Model for the Analysis of Large-Scale Asset Purchases: Lessons Learned for Cambodia

Abstract

The DSGE model being analyzed involves four key market participants: households, banks, firms, and the central bank. This study's unique contributions, in comparison to other research papers, lie in the fact that households are not only permitted to purchase private securities like stocks and bonds, but also government bonds. However, households who possess a portfolio are required to cover transaction costs associated with their holdings. As the size of the portfolio increases, the transaction costs also increase. This limitation hinders households from engaging in complete arbitrage. In addition to output production firms, there are retail firms and capital production firms, distinguishing them from other papers that focus solely on output production firms. Notably, the central bank had the authority to purchase private securities as well as long-term government bonds. The DSGE model is a vital tool in contemporary economic analysis as it links microeconomics and macroeconomics. With the advancements in Cambodia's financial market and financial instruments, the integration of the DSGE model into policy analysis and formulation is the next logical step for economists and policymakers at the National Bank of Cambodia.