US Macroeconomic Model

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US Macroeconomic Model

• M. Peter Jurkat
• CS452/Mgt532 Simulation for Managerial Decisions
• The Robert O. Anderson Schools of Management
• University of New Mexico

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Macroeconomic Model

• Sets of difference equations are commonly used
  for macroeconomic models of US and other
  economies to study effects of policy decisions
  and legislation
• Example endogenous variables GNP, Income,
  Investments, Consumption,
• Example exogenous variables Government Spending,
  Tax Levels, Interest Rates, Price Controls and
  other Government Regulation,
• See USMacroSimulationProjectAssignment.doc

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Simplest Realistic Model?Robert S. Pindyck and
Daniel L. Rubinfeld (1988) Econometric Models and
Economic Forecasts, 4th Edition,
Irwin/McGraw-Hill, ISBN 0-07-913292-8, pp390-399

• With endogenous variables
• C consumption
• I investment
• Y gross national product (GNP)
• R interest rate
• And exogenous variables
• G government spending
• M money stock
• t time period
• Model Equation Set (circular, not simulated as
  is)
• Ct c0 c1Yt c2Ct-1
• It i0 i1(Yt-1 Yt-2) i2Yt i3Rt-4
• Rt r0 r1Yt r2(Yt Yt-1) r3(Mt Mt-1)
• Yt Ct It Gt

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Isolate Current (at time t) Endogenous Variables

• (1 c1)Ct - c1It c0 c1Gt c2Ct-1
  RHSC
• -i2Ct (1 i2)It
• i0 i1(Yt-1 Yt-2) i2Gt i3Ri-4
• RHSI
• -(r1 r2)Ct (r1 r2)It Rt
• r0 (r1 r2)Gt r2Yt-1 r3(Mt Mt-1)
• RHSR
• NB LHSi contains only linear endogenous
• variables at time t
• RHSi contains only endogenous variables
• prior to time t and exogenous variables

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Reduced Model Set(This set can be simulated)

• Solve previous equation set for Ct, It, and Rt
• Ct RHSC 1/(1 c1)
• c1i2/(1 c1 i2)(1 c1)
• RHSI(1 c1)c1/(1 c1 i2)(1 c1)
• It RHSCi2/(1 c1 i2)
• RHSI(1 c1)/(1 c1 i2)
• Rt RHSC (r1 r2)/(1 c1)
• i2(r1 r2)/(1 c1 i2)(1 c1)
• RHSI (1 c1)(r1 r2)/(1 c1 i2)(1
  c1) RHSR
• All right hand sides contain only endogenous
  variables at time prior to t and exogenous
  variables

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Parameter Identification

• Coefficients (cj, ij, rj) estimated by
  regressions from known, past time periods
• Since variables are not independent need special
  regression techniques can be crudely estimated
  by simple, independent regression one equation at
  a time
• Assumed to be representative of the time periods
  for which predictions are to be made

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Data Set Variables(see USMacroData1950-88.xls)

• C real aggregate personal consumption - GC82
• I real gross domestic investment - GPI82
• Y real GNP (net of exports and imports) - GNP
• R interest rate on a 3-month Treasury Bill -
  FYGN3
• G real government spending - GGE82
• M real money stock, narrowly defined - M1
• ?t quarterly time period