Simplifying Global Economic Forecasting: G3MOD for Central Banks and Policymakers

The IMF’s G3MOD is a semi-structural global forecasting model focused on the U.S., Euro Area, China, and the rest of the world, enabling central banks and policymakers to integrate external forecasts into quarterly projections. It supports scenario analysis, risk assessment, and informed decision-making by capturing trade, financial linkages, and macroeconomic shocks.

The working paper “G3MOD: A Multi-Country Global Forecasting Model”, developed by researchers from the IMF’s Institute for Capacity Development, including Iaroslav Miller, Daniel Baksa, Philippe Karam, and Tugrul Vehbi, introduces a semi-structural gap-trend model tailored to the G3 economies—United States, Euro Area, and China while accounting for the rest of the world as a consolidated economic block. Designed for central banks and policymakers, especially in resource-constrained environments, G3MOD aligns external assumptions like those from the IMF’s World Economic Outlook with quarterly projection models. By incorporating trade and financial linkages, the model supports frequent macroeconomic forecasting, policy simulations, and risk assessments.

A Semi-Structural Model for Macroeconomic Dynamics

G3MOD leverages a semi-structural framework based on IS curves for demand-side analysis, Phillips curves for inflation, and uncovered interest parity conditions for exchange rate dynamics. This flexible structure captures short-term fluctuations and long-term growth trends, accommodating diverse monetary policy regimes such as inflation targeting in the U.S. and Euro Area, and China’s managed exchange rate system. The model is calibrated iteratively to ensure theoretical consistency and predictive accuracy, aligning historical data with modern economic developments. Its design integrates with existing central bank models, enabling the seamless incorporation of external forecasts and custom scenarios, even for institutions with nascent modeling capabilities.

Analyzing Major Macroeconomic Shocks

The model excels in analyzing global economic shocks, illustrating their direct and spillover effects. For instance, it shows how a 100-basis point increase in U.S. policy rates tightens financial conditions, contracts domestic demand, and affects global markets through trade and currency adjustments. Similarly, a reduction in domestic demand in the U.S. or China demonstrates how the magnitude of global economic impact differs based on the source of the shock. G3MOD also assesses global oil price surges, highlighting their inflationary pressures and prompting varied monetary policy responses in the U.S., Euro Area, and China. The model evaluates Euro Area risk appetite shifts, showing how they influence exchange rates, inflation, and competitiveness. These simulations underscore G3MOD’s capability to capture complex economic interdependencies across regions.

Bridging Historical Insights and Forecasting

G3MOD uses the Kalman filter to estimate unobserved variables like output gaps and inflationary pressures, allowing policymakers to construct consistent economic narratives. Historical analyses reveal how the model interprets pivotal events such as the Global Financial Crisis (GFC), the COVID-19 pandemic, and post-pandemic recovery. For example, during the pandemic, G3MOD identified significant demand contractions and linked them to inflationary pressures stemming from supply chain disruptions. Post-pandemic, the model captured heightened inflation persistence and increased sensitivity to commodity prices. Despite these challenges, G3MOD demonstrated strong forecasting performance, outperforming random-walk benchmarks over medium- to long-term horizons for key macroeconomic indicators like GDP growth and inflation.

Transforming External Forecasts into Actionable Insights

One of G3MOD’s most practical applications is its ability to translate institutional forecasts, such as those from the IMF’s World Economic Outlook, into quarterly trend-gap decompositions. This process breaks down annual forecasts into actionable insights, linking GDP growth projections to inflation, output deviations, and monetary policy paths. Policymakers can use these decompositions to align external assumptions with domestic economic strategies, enabling more informed decisions. For example, by interpolating annual GDP projections into quarterly data, G3MOD estimates inflationary pressures and monetary policy impacts over time. Its ability to simulate various scenarios—such as tighter monetary policies or rising commodity prices—makes it indispensable for central banks in emerging and developing economies seeking tailored external assumptions.

A Versatile Framework for Policymakers

G3MOD’s adaptability extends to its role in scenario analysis and risk assessment. It provides policymakers with tools to evaluate interventions like fiscal stimulus or monetary tightening under different economic conditions. Its capacity to reflect dynamic relationships among key economic variables makes it valuable in addressing challenges such as supply chain disruptions, geopolitical tensions, and global financial volatility. For example, the model’s simulations have shed light on how recent inflation surges and monetary policy shifts interact across the U.S., Euro Area, and China, offering insights for tailored policy responses. Additionally, G3MOD’s open-source nature ensures accessibility, fostering capacity-building among policymakers and researchers worldwide.

A Reliable and Evolving Resource for Economic Analysis

G3MOD represents a significant advancement in global forecasting and policy analysis. By integrating trade and financial linkages across the G3 economies and the rest of the world, it equips policymakers with a robust tool for navigating complex economic landscapes. Its ability to translate external forecasts into detailed, trend-based projections ensures consistency in macroeconomic analysis, even for institutions with limited modeling resources. Designed for regular updates and adaptability, G3MOD remains relevant as global economic conditions evolve. For central banks and ministries of finance, it not only meets immediate forecasting needs but also provides a foundation for future enhancements, making it a critical resource for informed decision-making.