Medium term macroeconomic modelling of the UK economy

Completed

Fossil Fuels: Oil Gas and Coal(Oil and Gas, Other oil and gas)
Not Energy Related
Other Cross-Cutting Technologies or Research(Environmental, social and economic impacts)

Basic and strategic applied research

SOCIAL SCIENCES (Economics and Econometrics)

Not Cross-cutting
Sociological economical and environmental impact of energy (Other sociological economical and environmental impact of energy)

Professor M Beenstock
Cass Business School
City University

Standard

ESRC

01 October 1983

30 September 1987

48 months

£231,775

No relevance to Underpinning Sectors

London

ESRC Oil

Professor M Beenstock, Cass Business School, City University

Objectives not supplied

The distinguishing feature of the model is its concern with the secular development of the economy rather than its cyclical or short- term development. The majority of UK models are demand-side models in the sense that the evolution of the economy largely reflects the behaviour of aggregate demand. Aggregate supply is either assumed to be time-trended or represented in some other naive fashion. It is perhaps partly for this reason that these models have been largely concerned with the short term economic outlook ie over a horizon of up to three years. They assume implicitly that over this short-term horizon the supply side will be approximately constant. Likewise they implicitly assume that over the medium-term (3-10 years), the supply side cannot be assumed to be constant. In contrast the approach here is to embed aggregate supply as well as the determination of aggregate demand within a broadly neoclassical framework. Correspondingly, its projection horizon would be 3-10 years although it will necessarily project short-term developments too. The model does not postulate trend growth rates or naive supply specifications. Instead a full specification of aggregate supply is proposed in which natural rates either in terms of levels or rates of growth are endogenous. In this respect the model does not compete with most existing models. On the contrary it is complementary to them in the sense that its comparative advantage rests with analyses of secular economic developments whereas the existing models comparative advantage rests with the short-term developments. Policy issues It is inevitable that the design of a model is heavily influenced by recent economic experience. As far as the medium-term is concerned, the experience of the 1970s has influenced the choice of issues upon which the model is designed to shed light. It is natural to expect any model to be able to explain the past. However, the researchers believe that the medium-term economic forces that are specified in the model will not only shed light on the past but will also be relevant to economic projection in the future. In particular, the effects of North Sea Oil, the public sector and commodity prices upon the economy are likely to remain important issues over the rest of the century. The principal secular issues that the model is designed to explain are: - (i) the determination of economic growth and the causes of slower growth especially during the 1970s; (ii) the distribution of outputbetween manufacturing and non- manufacturing. In particular, the model will seek to explain the decline in the share of manufacturing in Gross Domestic Product that took place during the 1970s. (iii) the determination of unemployment and especially its increase in the 1970s; (iv) the fall in the project share and rates of return on capital especially during the 1970s; (v) the determination of import penetration and the share of GDP that is allocated to exports; (vi) the share of investmentin GDP; (vii) the determination of the real exchange rate in the short and medium terms. Although the model is primarily concerned with the medium-term structure of the UK economy and real economic variables, it is also concerned with nominal variables such as inflation, nominal interest rates and the exchange rate. The model seeks to explain the inflation of the 1970s and the reasons why UK inflation differed from the inflation of the Organisation for Economic Cooperation and Development within amedium-term context. It is also stressed that the real and monetary sectors of the model are not dichotomous and that real economic variables interact with monetary variables. The model focuses on a number of related policy issues. These are: - (i) the effect of public expenditure and its composition between current and capital expenditure on aggregate supply; (ii) the effects of public finance (taxation, bond finance and monetisation) and its composition on aggregate supply; (iii) the effectsof imported raw materials and energy on aggregate supply; (iv) the effects of North Sea oil on the economy; (v) the relative economic performance of the UK in relation to other OECD countries. Following the publication in 1981 of the ESRC Subcommittee report Macro-Economic Research in the United Kingdom,

20/09/11