RDP 1977-07: Money and the Balance of Payments Appendix A: The Specification of the Core Models
October 1977
The Equations of the U.K. Economy Model[1]
(1) Real expenditure, demand for money
(2) Real exports of goods and services
(3) Real imports of goods and services
(4) Real output
(5) Price of output
(6) Price of exports
(7) Bank rate
(8) Tax receipts
(9) Domestic credit
(10) Net capital flows
(11) International reserves
(12) Stock of money
The last three equations are discussed in the text.
The Equations of the RBA76 Model of the Australian Economy
1. Real expenditure
1a. household expenditure, demand for money, exchange rate expectations
1b. net business fixed investment
2. Exports of goods and services
3. Imports of goods and services
4. Output of goods
5. Domestic prices
5a. price of output
5b. price of government current goods and services
6. Price of exports
7. Bond rate
8. Taxes
8a. direct taxes
8b. indirect taxes
9. Credit market
9a. domestic credit expansion
9b. non-bank demand for government securities
9c. bank advances
9d. interest payments on government debt
10. Net capital inflow
11. Foreign reserves
12. Volume of money
These equations are discussed in the text.
13. Exchange rate
14. Labour market
14a. changes in labour demand, desired inventories
14b. labour supply
14c. average weekly earnings
15. Change in inventories
16. Business fixed capital stock
17. Labour demand
Notation
Variables endogenous to both models:
| C | domestic credit |
| d | real expenditure: in U.K. model, consumption and investment; |
| in RBA76, consumption only | |
| F | in U.K. model, stock of net foreign assets owned by U.K. residents; in RBA76, stock of net domestic assets owned by foreigners |
| i | real imports of goods and services |
| M | stock of money |
| P | price of output |
| P | price of exports |
| R | international reserves |
| rb | official interest rate: in U.K. model, Bank Rate; |
| in RBA76, bond rate | |
| T | total taxation receipts (in RBA76, modelled implicitly as T1 + T2) |
| x | real exports |
| y | real output, net of depreciation |
Variables endogenous to RBA76 only:
| A | bank advances |
| B | non-bank holdings of government securities |
| E | exchange rate |
| I | interest payments on government debt |
| K | real business fixed capital stock |
| k | real business fixed investment |
| L | demand for labour (employment) |
| l | change in demand for labour |
| N | supply of labour (labour force) |
| P | price of government current goods and services |
| T1 | direct taxation receipts |
| T2 | indirect taxation receipts |
| v | real inventories of goods |
| W | average weekly earnings |
Exogenous variables:
| cb | real government cash benefits to private sector |
| g1 | real government current spending |
| g2 | real government capital spending |
| h | required asset ratio for all banks |
| Pi | price of imports, measured in $US |
| Pw | world prices, measured in $US |
| Pwl | wool prices, measured in $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 |
| QF1 | dummy variable for capital controls, 1973, 1974 |
| QF2 | dummy variable for capital outflow 1975(4) |
| QS | dummy variable for credit squeeze, 1961, 1973 |
| QUS | dummy variable for devaluation of $US, 1973 |
| rw | world interest rate |
| t | time |
| t1 | average income tax rate |
| t2 | average expenditure tax rate |
| t3 | average tariff rate |
| to4 | average payroll tax rate (constant) |
| WA | award wages |
| z | real net property income |
| £ | expected rate of depreciation of exchange rate, % p.a. (in RBA76, modelled implicitly as a function of endogenous log EPw/p and exogenous QE) |
| A | stock of official foreign debt |
| D | is the differential operator d/dt |
| λ1 | is the steady state rate of growth of real output |
| λ2 | is the steady state nominal growth rate |
| λ3 | is steady state rate of growth of world real income |
| λ4 | is regular growth of real award wages |
Footnote
A list of the variables which appear in the model is included in Appendix A; D is the differential operator d/dt. The estimated model includes dummies for each world war, in asset and commodity demand functions. [1]