Towards Applied Disequilibrium Growth Theory: Vi. Substitution, Money-Holdings, Wealth-Effects and Further Extensions
UTS Business Working Paper No. 98
57 Pages Posted: 8 Feb 2006
Date Written: December 1999
In this paper we present a theoretical disequilibrium growth model of an open economy with a full set of markets and sectors and with heterogeneous agents in the household sector. This model allows, on the one hand, for basic consistency checks, such as fully specified bedget identities and a well-defined steady state refernce path and is therefore carefully specified from the theoretical point of view. On the other hand, the model is already fairly close to applied modern structural model building and thus is rich in descriptive detail.
The model exhibits five real and five financial markets. Consumption behavior is formulated by way of the life cycle hypothesis and savings of worker households are allocated to money and short-term bonds, while savings of pure asset holders concern all financial assets considered (equities and long-term bonds, domestic and foreign ones). Firms use three inputs (labor, capital and imports) to produce two outputs (domestic goods and export commodities) by way of a nested CES/CET technology and they produce in a cost-minimizing way subject to a domestic demand constraint, also formulating medium run targets that guide their investment and pricing decision. The government sector is described in a very detailed way, including a variety of taxation schemes in particular and also a debt target according to which taxes are adjusted. We consider sluggishly adjusting wages and prices, coupled with heterogeneous expectations formation, and have on this basis fluctuating rates of capacity utilization on the labor market as well as on the market for goods. Financial markets, finally, are described by delayed adjustment processes towards interest rate parity conditions.
The paper itself presents only the extensive form of the model with all of its details and compares it to the Murphy model for the Australian economy and also with the Multimod model, Mark III of the IMF. In subsequent papers we derive the intensive form of the model, its interior steady state solution and a 22 dimensional core dynamics which is then investigated from the theoretical and the numerical point of view, concerning the major feedback loops it contains and the stabilizing or destabilizing implications they give rise to. The main perspective of our work is to contribute to a better theoretical underpinning and understanding of modern applied macrodynamic models which nowadays also attempt to be complete with respect to budget identities and steady state reference paths, but which have not yet fully grasped the stability implications of their model buildings and basically have not yet included heterogeneity with respect to households and expectations formation.
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