Comparative Properties of Models of the UK Economy

By Fisher, P. G.; Tanna, S. K. et al. | National Institute Economic Review, August 1989 | Go to article overview

Comparative Properties of Models of the UK Economy


Fisher, P. G., Tanna, S. K., Turner, D. S., Wallis, K. F., Whitley, J. D., National Institute Economic Review


COMPARATIVE PROPERTIES OF MODELS OF THE UK ECONOMY

This paper describes the properties of five major macroeconometric models of the UK economy, through analysis of six standard policy simulations. The simulations are conducted, as far as possible, in a consistent manner across the models. The models were deposited with the ESRC Macroeconomic Modelling in late 1988 and this paper follows comparative analysis of previous model vintages in this Review and in earlier Bureau publications. The paper highlights differences between the models that emerge from the treatment of exchange rates, imports, consumption and price adjustment. Recent changes to the models are shown to have increased simulation differences between them.

1. Introduction This paper describes the properties of five major macroeconometric models of the UK economy, through analysis of a number of standard policy simulations. The models are those of the London Business School (LBS), the National Institute of Economic and Social Research (NIESR), Her Majesty's Treasury (HMT), the Bank of England (BE) and the Liverpool University Research Group in Macroeconomics (LPL), as deposited with the ESRC Macroeconomic Modelling Bureau in late 1988. The simulations are conducted, as far as possible, in a consistent manner across the models.

Four of the five models considered are large quarterly models (LBS, NIESR, HMT, BE) and the remaining model is a small annual model (LPL). The latter (Minford et al., 1984) has less than 20 behavioural equations, and it represents the new classical/rational expectations approach to macroeconomic policy analysis. This model has remained largely unchanged over the last five years and hence there is little discussion of its simulation properties in this paper. All of the quarterly models originate from the Keynesian income-expenditure approach, although there has been an increasing tendency over recent years to incorporate aggregate supply considerations. In particular the latest versions of the LBS and NIESR models include important changes to their structure in this respect.

The major change to the LBS model (Dinenis et al., 1989) is the inclusion of a consistently estimated set of equations determining the demand for and price of domestic output. Distinctions are made both between the manufacturing and non-manufacturing sector and between domestic and foreign demand for home producers' output. The share of home producers' output in total domestic demand is a function of relative (domestic to import) prices and a time trend, although the equation can be reparameterised in a more conventional form which determines the share of imports in domestic demand in terms of the same explanatory variables. Price adjustment now plays a greater role: there is upward pressure on prices if output increases relative to the capital stock or if input prices increase. Dinenis et al. (1989) show how the long-run solution to the price equations can be inverted in order to obtain implicit long-run aggregate supply functions where domestic output is dependent on the capital stock and the relative price of inputs to output. One area of the LBS model which remains unchanged is the disaggregated model of the financial sector, which emphasises the role of forward expectations and which, inter alia, determines the behaviour of the exchange rate.

The NIESR model (Wren-Lewis, 1988) has also changed substantially since our previous review (Fisher et al., 1988). Of particular note is the incorporation of a putty/clay vintage production function for the manufacturing sector which relates the level of productivity to investment, and determines capacity utilisation. The latter variable has an important role in the investment and import equations and also in the price adjustment process, where any increase in manufacturing output which is not matched by increased capacity leads to inflationary pressure from a higher profit mark-up. The model retains forward expectations in several areas, notably that of exchange-rate determination. …

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