SDS-FPS: A small demand-side version of the forecasting and policy system core model

This paper describes the development of SDS-FPS, which is a small demand-side model calibrated to match some of the dynamic properties of the Reserve Bank’s Forecasting and Policy System (FPS) Core Model. SDS-FPS is capable of matching the dynamic properties of FPS for a wide range of disturbances, despite lacking relative prices, having no explicit supply side, and having the entire demand side described by a single IS equation. The calibration of SDS-FPS has also provided some insights into the features of FPS that cannot be replicated in a small demandside model.