RDP 7702: Inflation and Economic Stability in a Small Open Economy: A Systems Approach Appendix A. The Model
June 1977
The specification of the model is as follows:
1. Household expenditure, demand for money
2. Net business fixed investment
3. Exports of goods and services
4. Imports of goods and services
5. Output, desired inventories
6. Price of output
7. price of government current goods and services
8. Price of exports
9. Average weekly earnings
10. Labour supply
11. Labour demand
12. Non-bank demand for government securities
13. Net capital inflow
14. Bank advances
15. Direct taxes
16. Indirect taxes
17. Balance of payments
18. Supply of money
19. Change in inventories
20. Bond rate
21. Exchange rate
22. Business fixed capital stock
Note: A subscript of zero indicates a constant.
The variables used in the model are:[43]
| A | all bank advances to private sector |
| B | bonds held by private (non-bank) sector |
| c* | real cash benefits to persons |
| d | real household expenditure |
| E | exchange rate ($A/$us) |
| F | net Australian capital owned by overseas residents |
| g* | real Australian government current spending |
| i | real imports of goods and services |
| k | net real business fixed investment |
| K | stock of business fixed capital |
 |
real Australian government capital stock |
| L | labour demand |
| M | stock of money (M3) |
| N | labour supply |
| P | price of output |
| Pg | price of government goods and services |
 |
Australian import prices ($US) |
| Px | price of exports |
 |
world prices ($US) |
| QA* | dummy variable for requests to limit advances, 1961 |
| QE* | dummy variable for exchange rate expectations, 1972–5 |
| QER* | dummy variable for timing of exchange rate changes, 1972, 1973, 1974 |
| QF* | dummy variable for capital controls, 1973–4 |
| QS* | dummy variable for credit squeeze, 1961, 1973 |
| QUS* | dummy variable for devaluation of $US, 1973 |
| R | foreign exchange reserves |
| r | bond rate |
 |
world interest rate |
| t* | time |
 |
income tax rate |
 |
expenditure tax rate |
 |
tariff rate |
| T1 | direct tax receipts |
| T2 | indirect tax receipts |
| V | stock of inventories |
| W | average weekly earnings |
| wA* | real award wages |
| x | real exports of goods and services |
| xw* | real world exports |
| y | real output (net of depreciation) |
| z* | required asset ratio for all banks |
| λ1 | target rate of growth of inventories |
| λ2 | target rate of monetary growth |
| λ3 | regular growth of real award wages |
|
* The items marked with an asterisk are exogenous for estimation purposes. As discussed in section 4 however, some of these items are at least in part endogenous in the real world. |
|
Footnote
The precise definitions and sources for all variables are given in Appendix B of Jonson, Moses and Wymer [1976]. [43]