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As Ken Wallis has pOinted out. all macroeconomic forecasters and policy analysts use economic models. That is. they have a way of going from assumptions about macroeconomic policy and the international environment. to a prediction of the likely future state of the economy. Some people do this in their heads. Increasingly though. forecasting and policy analysis is based on a formal. explicit model. represented by a set of mathematical equations and solved by computer. This provides a framework for handling. in a consistent and systematic manner. the ever-increasing amounts of relevant information. Macroeconometric modelling though. is an inexact science. A manageable model must focus only on the major driving forces in a complex economy made up of millions of households and fIrms. International economic agencies such as the IMF and OECD. and most treasuries and central banks in western countries. use macroeconometric models in their forecasting and policy analysis. Models are also used for teaching and research in universities. as well as for commercial forecasting in the private sector.

Inhaltsverzeichnis

Chapter 1. How to Use this Book

Abstract
The main purpose of this monograph is to give a detailed account of a modern macroeconometric model. We anticipate that readers will have interests in one or more of the following areas:
• macroeconomic policy;
• forecasting aggregate demand and employment, as well as interest and exchange rates, and other conditions in fmancial markets;
• the influence of contemporary macroeconomic theory on the process of macro modelling of an open economy; and
• practical issues in the design and construction of an aggregative model for policy analysis and forecasting.
Alan A. Powell, Christopher W. Murphy

Chapter 2. Distinguishing Features of MM

Abstract
MM is a 100-equation, quarterly, macroeconometric model of the Australian economy designed for policy analysis and forecasting. This chapter highlights the model’s distinctive features as background for the remainder of this book.
Alan A. Powell, Christopher W. Murphy

Chapter 3. Principal Mechanisms in MM

Abstract
This chapter reviews important paradigms that heavily influence the architecture of MM. We commence with some well known contributions to the pure theory of macroeconomics; in particular, we focus on the work of Mundell and Fleming and on Dornbusch’s model of overshooting exchange rates. Some brief attention is paid also to the open-economy macro models that were developed during the 1980s; a characteristic of the latter is the incorporation of a binding intertemporal budget constraint on the actions of governments.
Alan A. Powell, Christopher W. Murphy

Chapter 4. Overview of Part Two

Abstract
Chapters 5 through 24 give a detailed account of the structure of the MM macro model.
Alan A. Powell, Christopher W. Murphy

Chapter 5. Wage Behaviour

Abstract
We have seen in Part 1 of this book that one of MM’s strengths is its interpretable ‘steady state’; namely, a balanced growth path. The economics of balanced growth was worked out in the ‘fifties and ‘sixties in terms of single-sector growth models (Solow, 1956; Swan, 1956; Meade, 1961). One conundrum which had to be solved in this literature was how to treat technological change. It turns out that only relatively specialized treatments of technological change are simultaneously consistent with both the existence of a balanced growth path and with the stylized facts characterizing modern economies.
Alan A. Powell, Christopher W. Murphy

Chapter 6. Labour Force Participation

Abstract
The supply of labour is reckoned as the number of persons currently in a job or actively seeking one. This total — ‘the labour force’ — may be factored into the number of potential workers (those of working age) and the labour force participation ratio. The latter is characterized in MM by the ratio of the actual labour force to its underlying potential size.
Alan A. Powell, Christopher W. Murphy

Chapter 7. Private Consumption Behaviour

Abstract
Following Ando and Modigliani’s (1963) specification, the determinants of private consumption in MM are the current values of disposable labour income (inclusive of transfers) and of non-human wealth. This consumption function is built in two stages. In the first an equilibrium consumption level is specified to depend on the two variables just mentioned. In the second, a dynamic equation is developed which allows for partial adjustment in the short run. In developing the consumption function, care is taken to ensure that the growth rate of real consumption converges in the long run to the natural growth rate of the economy.
Alan A. Powell, Christopher W. Murphy

Chapter 8. Behaviour of the Rental Price of Housing

Abstract
As in most macroeconomic models, commodity disaggregation in MM is restricted to the minimum necessary to capture major features of the macroeconomy. Housing has a special status in MM.
Alan A. Powell, Christopher W. Murphy

Chapter 9. Production of Housing Rental Services and Investment in Dwellings

Abstract
Activity in the residential building industry has long been of special interest to macroeconomists. This is partly explained by the considerations mentioned above in Chapter 8, section 8.1, and partly by the strong relationship between new house building commencements and the stance of the money market.
Alan A. Powell, Christopher W. Murphy

Chapter 10. The Enterprise Production Block of the Business Sector

Abstract
The neoclassical heart of MM consists of the twelve behavioural identities 115–126. These are referred to in this book as the enterprise production block of the business sector. They concern input and output decisions by business enterprises.
Alan A. Powell, Christopher W. Murphy

Abstract
The investment equation for fixed business capital in MM is driven by prospective profitability and by lagged demand conditions in the market for the domestic commodity, thus incorporating both neoclassical influences and an accelerator effect. Prospective profitability is measured by Tobin’s (average) q, which is the ratio of the market price of a second-hand unit of capital to the price of a newly constructed one. Hence there are strong parallels between this chapter and Chapter 9. The presence of the medium-run equilibrium price of the domestic good p Y MR in the investment equation, however, requires the theory of the enterprise pryoduction block laid out in Chapter 10.
Alan A. Powell, Christopher W. Murphy

Abstract
Supply- and demand-side influences are incorporated within MM’s dynamic (reduced form) equation for business sector employment EB. Other things equal, the rate of growth of employment in this sector equals the medium-run (smoothed) rate of growth of the workforce, plus a term proportional to the gap one quarter ago between desired (i.e., medium-run equilibrium) employment and actual employment. The constant of proportionality, ± 2 10 , is a coefficient to be estimated. Thus
$$\log {E_B} - \log {E_B}( - 1) = \hat n + \alpha _2^{10}\{ \log E_B^{MR}( - 1) - \log {E_B}( - 1)\} + other\;terms$$
(12.1.1)
Alan A. Powell, Christopher W. Murphy

Chapter 13. Import Supply and Demand

Abstract
Because Australia is taken to be too small for our demand to affect the world market prices of the things we import, description of the supply of imports involves little more than formalities. These are set out in section 13.2. The necessary notation is listed in Table 13.2.1.
Alan A. Powell, Christopher W. Murphy

Chapter 14. Aggregate Export Supply

Abstract
As is evident from Figure 10.2.1, exports in MM are modelled on a ‘tops-down’ basis. Thus equilibrium aggregate exports are first determined on the basis of equality between the marginal rate of transformation between the domestic good and the aggregate exportable and their relative product price ratio; allowance is then made for frictions in adjustment to this equilibrium; finally, the actual level of aggregate exports is disaggregated in proportions which are ‘fixed’ in the sense of being unresponsive to relative component prices8, but variable in the sense that they change autonomously over time. This chapter deals only with the first two of these stages; disaggregation is discussed in Chapter 15.
Alan A. Powell, Christopher W. Murphy

Chapter 15. Disaggregation of Export Supply

Abstract
In MM, production of exports is disaggregated into (agricultural) ‘commodities’ Xc, and the remainder X0 . We commence this chapter by specifying the autonomous trend used to disaggregate export production. The estimates of the parameters of this trend equation are then reported in section 15.2. The compositional trend equation is manipulated in sections 15.3 and 15.4 respectively to yield the supply functions for ‘other’ exports and for ‘commodity’ exports respectively. Finally, in section 15.5 the aggregate export price index px is constructed.
Alan A. Powell, Christopher W. Murphy

Chapter 16. Overseas Demand for ‘Commodity’ Exports

Abstract
There are two sources of demand for ‘commodity’ exports: final demand by foreigners, and temporary demand at home for stock building. The former is treated in the present chapter; the latter in Chapter 17. Notation for the overseas demand equation for Australian ‘commodity’ exports is given in Tables 16.1.1 and 16.1.2. The latter also includes estimated parameters.
Alan A. Powell, Christopher W. Murphy

Chapter 17. Inventory Investment in ‘Commodity’ Exports

Abstract
The notation in this section is generic; it is made specific in its applications below to inventory investment in the exportable ‘commodity’ (whose production level is Xc), and later in Chapter 19 to inventory investment in the domestic good (whose output is YD). for current purposes, define
$$S = Stock\;of\;inventories\;at\;the\;end\;of\;the\;current\;quarter;$$
(17.1.1a)
$${F_S} = flow\;of\;inventories\;during\;the\;current\;quarter;$$
(17.1.1b)
where Fs > 0 implies a build up, and Fs < 0 a run down. Under the assumption that physical depreciation/deterioration is negligible, the identity linking inventory investment Fs to stocks is
$${F_S}(t) + S(t - 1) = S(t)$$
(17.1.2)
, where S(t) is the outgoing stock at the end of quarter t, and Fs(t) is the flow during that quarter.
Alan A. Powell, Christopher W. Murphy

Chapter 18. Demand for Non-‘Commodity’ Exports

Abstract
The treatment of non-‘commodity’ exports follows that of ‘commodity’ exports in Chapter 16 above. Notation is given in Tables 18.1.1 and 18.1.2; the latter also contains estimated coefficients. Because the parallel with Chapter 16 is so exact, the demand and price flexibility equations are reproduced below in section 18.2 without further comment. Section 18.3 contains a brief remark about statistical difficulties encountered in estimation. This short chapter concludes in section 18.4 with a discussion of the steady-state price flexibility equation for non-’commodity’ exports.
Alan A. Powell, Christopher W. Murphy

Chapter 19. Domestic Good Inventory Investment

Abstract
With MM’s treatment of traded goods now fully described, we return to the scheme laid out in the first section of Chapter 17, and apply it to the domestic good. The formulation for the desired stock of inventories is described in section 19.2, and the dynamics of adjustment to this level in section 19.3. Estimated coefficients are reported in section 19.4. Notation for variables is set out in Table 19.1.1, and for coefficients in the results table, Table 19.4.1. Finally, the steady state is discussed in section 19.5.
Alan A. Powell, Christopher W. Murphy

Chapter 20. Price Dynamics for the Domestic Good

Abstract
This chapter is structured as follows: in this section, the form chosen for the domestic good’s price dynamics is set out, together with a short discussion of the equation’s steady state. Then in section 20.2, notation is tabulated, estimated coefficients are reported, and the dynamics of the price of the domestic good is illustrated pictorially for the cases of a temporary fiscal contraction and a temporary rise in the overseas price of ‘commodity’ exports.
Alan A. Powell, Christopher W. Murphy

Chapter 21. Sales of the Domestic Good; Miscellaneous Identities for Investment and Capital

Abstract
This chapter lists four identities. The first defines aggregate sales of the domestic good in terms of its components; namely, private and public consumption and investment spending, and maintenance of the housing stock. Later in section 21.2 it is demonstrated that together with e behavioural equation for stock-building and an accounting identity from Chapter 19, the identity defming sales of the domestic good implies that output of the domestic good in MM is demand determined.
Alan A. Powell, Christopher W. Murphy

Chapter 22. The Government Sector

Abstract
Governments impinge on the economy in at least four ways:
(i)
General government They provide goods and services (e.g., schooling, police services and defence) in areas in which private enterprises would not do so, or would do so in a way judged socially sub-optimal by the polity.

(ii)
Transfer payments They transfer command over goods and services from certain groups to others (e.g., from the employed to the unemployed).

(iii)
Public enterprises They run certain trading enterprises which (at least in theory) could be run with the same or higher social efficiency by private enterprise.

(iv)
Macroeconomic management They attempt to modify the evolution of the economy so as to avoid the more extreme troughs and peaks in economic activity.

Alan A. Powell, Christopher W. Murphy

Chapter 23. Financial Markets

Abstract
In Chapter 22 above the public-sector’s outlays and revenues were described, and also the method of fmancing deficits; namely, by borrowing overseas and from the domestic private sector in exogenously fixed proportions. In this chapter we specify equations for the determination of interest rates and give an account of private sector portfolio decisions. Two financial assets are distinguished: money and bonds. Assets of the latter type (privately or publicly issued, domestic or foreign) are treated as perfect substitutes.
Alan A. Powell, Christopher W. Murphy

Chapter 24. National-Accounting, Stock-Flow and Miscellaneous Identities

Abstract
This chapter is a compendium of those MM equations which have not been covered above in Chapters 5 through 23. All of the remaining equations are identities, and many of them deal with stock-flow accounting. However we start, in section 24.2, with the identities for gross national expenditure and for gross domestic product. Stock-flow identities are listed in section 24.3, and lead-lag identities in section 24.4. Finally, three definitional identities used in the implementation of MM — which were encountered in the exposition above, but not formally listed there as equations of the model — are set out in section 24.5.
Alan A. Powell, Christopher W. Murphy

Chapter 25. Introduction to the Simulations

Abstract
Our aim in Chapters 26 and 27 is to integrate Parts 1 and 2 of this book. Thus the paradigms outlined in Chapter 3 should come to life by tracing the operation of MM’s structural-form equations as they generate the economy’s responses to monetary and fiscal shocks.
Alan A. Powell, Christopher W. Murphy

Chapter 26. Monetary Shocks

Abstract
A monetary shock was examined briefly above in Chapter 3, subsection 3.5(a). There it was noted that although the long-run effect was the same as in the Dornbusch model (also discussed in that chapter, section 3.3), the dynamics in MM are a good deal more complicated. This chapter aims to examine the response of MM to an unanticipated, permanent, one per cent increase in the money supply in rather more detail than was possible in the synoptic account given in Chapter 3. As before, our starting point is the Dornbusch model (DBM). The features shared by MM and DBM are reviewed in section 26.2.
Alan A. Powell, Christopher W. Murphy

Chapter 27. A Fiscal Shock

Abstract
In this chapter, the shock examined is an unanticipated, permanent, increase is government spending equivalent to one per cent of GDP in the control solution. This fiscal stimulus is spread evenly across the three exogenous components of public sector expenditure; namely, general government employment EG, public consumption CG and investment IG by general government. The shares of these three items in total exogenous government spending on goods and services are 0.6217, 0.2595 and 0.1188 respectively. (Note that the last item excludes investment by publicly owned business enterprises.)
Alan A. Powell, Christopher W. Murphy

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