A disequilibrium macrodynamic model of fluctuations

A non-linear disequilibrium macrodynamic model of fluctuations in the labour and product markets, mediated by variations in factor shares, is developed and the existence of a periodic orbit is proved using the Hopf bifurcation theorem.     

A forecasting model of the Kenyan economy

A demand-oriented macroeconometric model of the Kenyan economy is developed and estimated in line with the cointegration technique. The estimated structure of the model is used to perform policy simulation experiments to determine the sensitivity of key macroeconomic variables to changes in exchange rate, net government current expenditure and nominal interest rate. The results of policy simulation experiments reveal that the exchange rate and fiscal policies are relatively more effective than the monetary policy, i.e. changing the nominal interest rate, in influencing the level of economic activity. The results point to the possibility of devaluation improving the international trade balance.     

The Bank of England quarterly model of the UK economy

The Bank of England first acquired a macroeconomic model of the UK economy in early 1973, and used it for forecasting in June and July of that year. The initial model was obtained from the London Business School (LBS), but the last 14 years or so have, on the part of both the Bank and the LBS, led to developments which now make the models no closer to each other than to other large scale models of the UK. This article describes the structure and central properties of the current version of the Bank model, which has some 663 variables, 134 of which are modelled by behavioural equations, 153 by technical equations, 212 identities and 164 exogenous variables. In order to provide a transitional step between the kind of models with which most macroeconomists are familiar and the full scale version of the Bank model, one part of the article presents a very simple stylized version of the full model. This is a stepping stone to the full model which is described and analysed on a sectoral basis in Part 3, with a complete listing of equations in Part 4. Some of the simulation properties, and hence full model dynamic responses, are considered in Part 5.     

A simple model of macroeconomic policy

This paper develops a simple model of macroeconomic policy in which the government minimizes a loss function with inflation and unemployment as arguments, subject to a Phillips curve constraint. The model is solved and a discrete time approximation taken. The model's empirical predictions are derived and some test results are presented.     

The Liverpool macroeconomic model of the United Kingdom

The paper describes the Liverpool Model, a rational expectations model of the UK economy used for forecasting since March 1980. The model is of the ‘new classical’ type, in that all markets clear; in the labour market, there is a union sector with one-year nominal wage contracts but the non-union sector clears excess demands. Equilibrium (or ‘natural rate’) values of output, employment, real wages, etc are endogenously determined. In- and out-of-sample errors, a full set of simulations, and a complete listing are included. The interim experience of the model as a test bed for rational expectations methods is ‘far from discouraging’.     

A macroeconomic rationing model of the belgian economy

This paper presents a small macroeconometric model that allows explicitly for the existence of rationing on the goods and labour markets and clearly distinguishes the three well-known regimes: Keynesian unemployment, classical unemployment and repressed inflation. The basic structure of the model contains two equations that can be estimated by single equation techniques. Estimation on Belgian postwar data establishes both the feasibility and the usefulness of the quantity rationing approach. Empirical results also reveal after 1972 an increasing discrepancy between the amount of labour supplied and the potential employment level determined by existing production capacities.     

Understanding the dynamics of the macroeconomic trilemma

This paper tests the autonomy of domestic monetary policy in the context of the macroeconomic policy trilemma for a large data-set of developing and developed countries covering three different time periods characterized with different exchange rate regimes and capital controls. The existing literature uses fixed coefficient methodologies to examine monetary policy independence; whereas we show that the coefficients of interest are unstable as countries switch between different exchange rate regimes and/or capital controls over time. The contribution is in using a time-varying parameter model that better captures the effects of the heterogeneity in different exchange rate regimes and capital mobility restrictions on monetary policy independence over time, allowing a more accurate test of the macroeconomic trilemma.     

The use of macroeconomic models in economic policy making: The Norwegian experience

Planning in Norway has a long tradition. The use of models is an integral part of short- and medium-term economic policy administration. A large-scale input-output model, MODIS IV, is used as the short- and medium-term forecasting and planning model. The use of the model secures consistency when analysing the economy. The model is very open in the sense that important interrelations in the economy are left out. The model contains only ‘good’ relations in the Leif Johansen sense of the word. Smaller aggregate and more closed versions of the model are used for analysing policy alternatives. These models contain both ‘good’ and ‘bad’ relations. The use of macroeconomic models is an important aid for proposals regarding economic policy in the Ministry of Finance. Because the whole ministry (with expert help from other ministries) takes an active part in the model work, MODIS IV serves as the centralizing mechanism. It helps to make economists from many ministries go around the same centre, speak the same ‘language’ and organize all relevant information and judgements in a consistent way. Experience shows that ‘numbers discipline’ and force the different arguments on to a higher level of precision.     

Economic planning for market economies : The optimality of planning in an economy with uncertainty and asymmetrical information

The paper is based on a disequilibrium model which is Keynesian in the ‘short run’, ie with given expectations, but which admits of a continuum of equilibria when expectations are rational. Expectations are adaptive (so that they are rational only in the long run) but can be influenced by an indicative plan. The government and the private sector have differing information sets, each knowing some things the other sector does not (spontaneously) know. It is shown that in this world, an optimal plan dominates a self-fulfilling plan, which in turn dominates a no-planning equilibrium.     

The Southampton econometric model

Four reasons are offered for presenting a paper on a now defunct model. First it was one of the very few attempts to construct a large-scale econometric model of the UK. Second, is its monetary sector — few models of that vintage had such a sector and, unlike modern models, its monetary sector was strictly Keynesian. Third is the explicit modelling of output and price equations. And fourth is the treatment of disequilibrium. Disequilibrium arises through the incompatibility of plans: total demand, for example, may exceed total supply and profits may be exceptionally high or unsustainably low. The rest of the paper gives a fuller account of the role of these disequilibrium terms in the explanation of price and output changes. Lists of equations and working papers are attached.     

Tariffs,trade and unemployment in a disequilibrium model: issues and policies

This paper studies the disequilibrium transition process engaged by increased openness to trade, and the effect of institutions, market behaviors and economic policies on that transition. The issue is analyzed with a simple two country (north and south), two goods model, amended in order to take into account the time dimension of both the production and the decision processes. Investigating the consequences of a tariff decrease by means of numerical simulations, we show to what extent wage and price setting, and the degree of tightness of monetary policy affect the outcome of the disequilibrium process. The main result is that capturing the gains associated with international trade requires market behaviors and economic policies, which are rather different from what is usually prescribed.

A model of the G-3

This paper presents a model of the G3 countries with a theoretically consistent model of the supply side, including a single regional model of the Euro area based on consistent aggregation. This is estimated using recent developments in econometrics for handling non-stationary data. It also uses alternative approaches to expectations formation, with an emphasis on bounded rationality. This retains the assumption of informed agents without making the extreme informational requirements of the REH. Our simulations show that under learning, the response of the economy to shocks may be extremely long lasting.     

Aggregation in macroeconomic models: an empirical input–output approach

The aggregation level of industries in the Danish macroeconomic model ADAM is examined using a new indicator of aggregation bias. The indicator is decomposed into contributions from the original industries, thereby clearly identifying the aggregation problems which caused the six industry groups of the older versions of ADAM to be disaggregated into the current 19 groups. An aggregation key minimizing the new bias indicator is found: from the microlevel of 64 industries, 18 ‘optimal’ industry groups are formed through ‘clustering’; these groups are very similar to the current ADAM groups. Altogether, the conclusions based on the new indicator closely resemble those reached through years of practical experience.     

On the sources of macroeconomic stability in the euro area

In the mid-1990s the euro area experienced a change in macroeconomic volatility. Around the same time, at business cycle frequencies the correlation between inflation and money growth changed markedly, turning from positive to negative. Distinguishing the periods pre- and post-1994, we estimate a dynamic stochastic general equilibrium model with money for the euro area. The model accounts for the salient facts. We then perform several counterfactual exercises to assess the drivers of these phenomena. The moderation of real variables was essentially due to relatively smaller shocks to investment, wage markups and preferences. The apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti-inflationary and gradual monetary policy.     

Backhouse and Boianovsky on “disequilibrium theory”. A review article of transforming modern macroeconomics. Exploring disequilibrium microfoundations, 1956–2003

Abstract

This article is an in-depth analysis of Backhouse and Boianovsky's book, Transforming Modern Macroeconomics: Exploring Disequilibrium Microfoundations, 1956–2003. I start with questioning Backhouse and Boianovsky's too broad understanding of the disequilibrium approach. Thereby they bring together theories that should be kept separate, those by Patinkin, Clower and Leijonhuvud on the one hand, and those by Barro and Grossman, Drèze and Benassy, on the other. I also substantiate my disagreement with their claim that an inner link exists between fixed price equilibrium theories and imperfect competition modelling. Finally, I put forward a few conjectures about the reason why fixed price modelling petered out.     

Empirical macroeconomic model of the Finnish economy (EMMA)

This paper provides a review of the empirical macroeconomic model (EMMA) built for forecasting purposes at the Finnish Labour Institute for Economic Research. The model is quite small, consisting of 71 endogenous and 70 exogenous variables. The number of behavioural equations is 15. The basis of the model is Keynesian, although the model has some novel properties. They are the treatment of the supply side and prices that follow the routes of the neoclassical synthesis. The parameters of the model are estimated from quarterly data that cover the years 1990–2005. The model also contains a Kalman-filtered variable to control the deep recession in Finland at the beginning of the '90s. This special feature brings the model closer to the new calibrated models.     

From equilibrium to disequilibrium: the genesis of Don Patinkin's interpretation of the Keynesian theory

This paper explains the reasons that led Don Patinkin to interpret the Keynesian theory in a disequilibrium perspective. We claim that the author adopted this position because he believed that the assumption of wage rigidity misrepresented the concept of involuntary unemployment and that, consequently, it had to be rejected. It is shown that this conclusion resulted from the confrontation of Patinkin, during the writing of his Ph.D. thesis, with the interpretations of the Keynesian theory argued respectively by Lange, Klein and Modigliani.