Control of medium-term dynamic econometric models: an application to the Cambridge Growth Project model

Abstract

The latest version of a large-scale multisectoral dynamic model of the UK's economy, developed by the Cambridge Growth Project under direction of Sir Richard Stone, is described. Its dynamic properties, owing to an investment cycle of the order of five or six years, and its main economic properties are analysed thoroughly.

The medium- term nature of the model is exploited to formulate a macroeconomic policy for the UK's economy. An understanding of the long- run dynamics of the economy is crucial, since a change in policy today has complicated consequences many years later. A regulation approach is proposed and yields an optimal reflationary mix for steering the economy over the next decade towards its desired target trajectory. The dynamics in the policy ensure satisfactory levels for growth, inflation and unemployment. The industrial implications of the feedback policy are discussed and suggestions for sectoral policy are given.

Get full access to this article

View all access options for this article.

References

Atkinson, A.B. 1969. The time-scale of economic models: how long is the long run?', Review of Economic Studies, 36,137-152.

Barker, T.S. , Borooah, V.K. , van der Ploeg, F. and Winters, L.A. 1980. 'The Cambridge Multisectoral Dynamic Model: an instrument for national economic policy analysis', J of Policy Modelling , 2 (4), 319-344.

Blackaby, F. (ed.). 1979. De-industrialisation , Heinemann, London.

Desai, M. 1973. 'Growth cycles and inflation in a model of the class struggle ', J of Economic Theory, 6, 527-545.

Frisch, R. 1933. 'Propagation problems and impulse problems in dynamic economics. In: Economic Essays in Honour of Gustav Cassel, George Allen and Unwin, London, 171-206.

Goodwin, R.M. 1967. 'A growth cycle'. In: Feinstein, C. H. (ed.). Socialism, Capitalism and Growth , CUP, Cambridge.

Johnston, J. and Timbrell, M. 1973. 'Empirical tests of a bargaining theory of wage rate determination ', The Manchester School, 141-167.

Haavelmo, T. 1945. 'Multiplier effects of a balanced budget', Econometrica, 13,311-318.

Harrod, R.F. 1939. 'An essay in dynamic theory' ,Economic Journal, 49,14-33.

10.

Hicks, J.R. 1950. A Contribution to the Theory of the Trade Cycle, Clarendon Press, Oxford.

11.

Livesey, D.A. 1973. 'Can macro-economic planning ever be treated as a quadratic regulator problem', IEE Conference Publication, 101,1-14.

12.

Livesey, D.A. 1978. 'Feasible directions in short-term economic policy, J of Optimization Theory and Applications, 25,383-406.

13.

Ploeg, F. van der. 1982. The industrial implications of an optimal reflationary mix for the British economy, Applied Economics, 14, 355-373.

14.

Ploeg, F. van der. 1982a. 'Medium-term planning with a multisectoral dynamic model of the UK economy', Int J of Systems Science, 13, 57-71.

15.

Ploeg, F. van der. 1982b. 'Government policy, real wage resistance and the resolution of conflict', European Economic Review, 19, 181-212.

16.

Stone, J. R. N , 1980. The relationship of demographic accounts to national income and product accounts', presented SSRC Workshop on Social Accounting Systems, Washington.

17.

Tarling, R.J. and Wilkinson, S.F. 1977. The Social Con. tract: post-war incomes policies and their inflationary impact', Cambridge Journal of Economics, 1 (4), 395- 414.

18.

UK Chancellor of the Exchequer. 1980. The Government's Expenditure Plans 1980-81 to 1983-84, Cmnd 7841, HMSO, London.

19.

UK Treasury. (1978). Report of the Committee on Policy Optimization, Cmnd 7148, HMSO, London.

20.

Wicksell, K. 1907. 'Krisernes Gata', Statsokonomisk Tidsskrift , 255-286.