RDP 1977-05: Modelling Monetary Disequilibrium Appendix A: Model Specifiction, Parameter Estimates and Test Statistics for Model 1

P.D. Jonson and J.C. Taylor

September 1977

Group 1 Equations

1. Household expenditure, demand for money
2. Net business fixed investment
3. Changes in labour demand, desired inventories
4. Price of output
5. Price of exports
6. Average weekly earnings
7. Het capital inflow
8. Volume of money

Group 2 Equations

9. Labour supply
10. Exports of goods and services
11. Imports of goods and services
12. Output of goods
13. Price of government current goods and services
14. Non-bank demand for government securities
15. Bank advances
16. Direct taxes
17. Indirect taxes
18. Foreign Reserves
19. Change in inventories
20. Bond rate
21. Exchange rate
22. Interest payments on government Debt
23. Domestic credit expansion

The variables used in the model are:[1]

A all bank advances to private sector
B bonds held by private (non-bank) sector
C* real cash benefits to persons
C domestic credit
d real household expenditure
E exchange rate ($A/$US)
F net Australian capital owned by overseas residents
Inline Equation real Australian government current spending
Inline Equation real Australian government capital spending
i real imports of goods and services
I interest payment on government debt
k net real business fixed investment
K stock of business fixed capital
l change in labor demand
L labor demand
M stock of money (M3)
N labor supply
P price of output
Pg price of government consumption goods and services
Inline Equation Australian import prices ($US)
Px price of exports
Inline Equation world prices ($US)
Pwl wool prices ($US)
Q* dummy variable to allow world prices relative to domestic prices to have a direct influence on inflation until 1971(3), but not afterwards
QA* dummy variable for requests to limit advances, 1961
QD* dummy variable for dock strike, 1969
QE* dummy variable for exchange rate expectations, 1972 to 1975
QER* dummy variable for timing of exchange rate changes, 1972, 1973, 1974
Inline Equation dummy variable for capital controls, 1973, 1974
Inline Equation dummy variable for capital outflow 1975(4)
QS* dummy variable for credit squeeze, 1961, 1973
QUS* dummy variable for devaluation of $US, 1973
R foreign exchange reserves
r bond rate
Inline Equation world interest rate
S real sales
t* time
Inline Equation income tax rate
Inline Equation expenditure tax rate
Inline Equation tariff rate
T1 direct tax receipts
T2 indirect tax receipts
V stock of inventories of goods
W average weekly earnings
Inline Equation real award wages
x real exports of goods and services
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
λ4 average growth rate of world trade

* The items marked with an asterisk are exogenous for estimation purposes.
TABLE A.1: PARAMETER ESTIMATES FOR GROUP 1 EQUATIONS FOR MODEL 1*
1959(3) – 1970(4)
MODEL 1
Parameter Estimate t-ratio
α1 .6206 6.58
α2 1.1777 5.37
α3 .1  
α4 2.3518 7.96
α5 .1426 5.82
α6 .0073 .70
α7 .2184 4.94
α8 .6907 4.17
α9 .3008 4.87
α10 .0874 7.24
α11 .1779 1.18
γ1 −.2428 5.40
γ2 0.0  
γ3 −.0793 3.27
γ4 −.1213 4.59
γ5 0.0  
γ6 −.2363 6.27
γ7 .0619 3.30
λ1 .012  
λ2 .0166 13.34
λ3 .0025  
λ4 .020  
β1 1.0  
β2 −.9985 2.76
β3 −3.4070 4.11
β4 −2.5599 4.54
β5 −.01  
β6 .1145 1.91
β7 .3  
β8 −.2030 4.81
β9 .7  
β10 .8  
β11 .0157 2.42
β12 0.0  
β13 .1  
β14 0.0  
β15 .1985 12.35
β16 1.3071 7.10
β17 .4038 5.67
β18 .2301 3.38
β19 −.01  
β20 .0601 4.13
β21 7.9549 2.93
β22 −.4138 4.80
β23 2.3652 8.48

* In this and all other tables, parameters without t-ratios are constrained at the given value.
TABLE A.2: PARAMETER ESTIMATES FOR GROUP 2 EQUATIONS FOR MODEL 1
1959(3) – 1975(4)
Parameter Estimtate t-ratio
α12 .1738 7.34
α13 3.7881 8.36
α14 2.0  
α15 1.2171 7.12
α16 .5  
α17 1.5228 5.51
α18 .1427 9.43
α19 .26  
α20 1.3304 6.54
α21 .1844 2.89
α22 1.1577 5.30
α23 −.0083 .83
α24 .0059 .43
α25 .0223 2.65
β24 −.0483 .88
β25 −1.0454 7.91
β26 .4568 5.39
β27 −.6142 10.01
β28 .5  
β29 3.1905 5.74
β30 .0141 .39
β31 −.8728 11.26
β32 .2095 6.27
β33 .8202 35.65
β34 11.0811 6.62
β35 −.2  
β36 1.8597 18.11
β37 .1043 5.78
β38 −.0140 3.17
β39 .0373 11.01
β40 −2.9910 4.26
β41 4.4974 5.82
β42 1.0477 38.00
β43 .0080 11.62
β44 −.0042 4.83
β45 .1389 7.30
β46 −.0233 8.74
β47 .1139 5.21
β48 −.0214 4.63
β49 .3250 2.88
β50 −.0334 1.89
β51 .2134 1.75
β52 .1063 12.93
β53 .0592 12.69
TABLE A.3: TEST STATISTICS FOR MODEL 1+
Variable r2 RMSPE1 RMSPE2
d .1342 .9 2.3
k .4133 .002* .002*
l .3432 .005*. .004*
P .4857 1.0 3.2
Px .2282 2.9 5.6
W .6284 .8 6.0
F .5741 1.6 8.2
M .7194 .6 5.2
N .8209 .2 1.3
x .4094 7.5 6.2
i .4194 4.5 6.8
y .2637 2.2 2.6
Pg .1825 2.3 4.8
S .3388 1.4 6.3
A .5440 1.0 7.5
T1 .4477 7.5 8.2
T2 .2863 2.6 3.7
R .4365 5.5 19.9
v .5958 1.2 8.6
r .6622 .001* .004*
B .7528 .8 4.4
I .1445 1.0 2.6
C .6399 .9 6.9
A .6755 .1 1.5
L .6147 .2 1.5

+ Test statistics are
x2 denotes systens coefficient of determination defined as the simple correlation coefficient between the actual and estimated values.
RMSPE1 denotes root mean square percentage error from a one period (within sample) simulation.
RMSPE2 denotes root mean square percentage error for a dynamic (within sample) simulation.
Figures denoted * are root mean square errors and not root mean square percentage errors.

Footnote

The precise definitions and sources for all variables are given in Appendix B of Jonson, Moses and Wymer (1976). [1]