Loosely-Coupled and Event-Messaged Interactions - CEUR-WS.org
Not the OBR - Post-Keynesian Economics Society | PKES€¦ · •Short-term forecasts assume...
Transcript of Not the OBR - Post-Keynesian Economics Society | PKES€¦ · •Short-term forecasts assume...
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Not the OBR
A Macro-economic Policy Model of the UK Economy
with insights from Godley & Lavoie
Ken Coutts and Graham Gudgin
Centre For Business Research, Judge Business School,University of Cambridge
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Post-war Growth Trend Has Broken Down
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GDP per HEAD
2.75% pa Trend
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The OBR Model
• Much of the OBR model is recognisable to Keynesians
• But GDP is not determined as the sum of forecasts for the components of expenditure
• Instead medium term GDP is projected as assumedproductivity x labour supply to give productive capacity.
• Short-term forecasts assume convergence to full-capacity trend in 3yrs. Demand ‘messaged’ to meet this condition.
• NB This means there is no multiplier
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A Keynesian Model of the UK Economy(New, but not New-Keynesian)
The CBR model consists of:
• 250 variables with data from 1950 to 2015
• 80 econometric equations (ECMs fitted on annual data 1950-2015)
• 145 identities
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CBR Macro-Economic Modelbroad structure
• 4 sector approach: households, companies, government and foreign sectors.
• Stock-flow consistent with tendency for ratios of assets to incomes to stabilise
• Consumer spending depends on household borrowing as well as income, assets and liabilities
• Endogenous investment and capital stocks
• Mark-up pricing (i.e. consumer prices rise with wage and other costs)
• Wages determined as attempts to gain a traditional share of value-added but constrained by changes in the employment rate, minimum wage and migration
• Employment (& hence productivity) depend on GDP, capital stock, real wage & interest rate (i.e. more neo-classical as migration has grown)
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CBR Macro-Economic Modelexogenous variables
• World trade (weighted by UK markets)
• Government fiscal policy plans (tax rates and nominal spending plans).
• Short-term interest rate (used as a policy variable to target consumer price inflation)
• Interest rates in the USA
• Global price of oil and other raw materials
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Consumption FunctionDependent Variable: D(CV)Method: Least Squares
Sample: 1975 2015
Variable Coefficient t-Statistic
C 14349 1.3
CV(-1) -0.43 -5.8
YD(-1) /CP(-1) 0.34 5.2
FASN(-1)/(CP(-1)) 0.013 2.6
(KHN(-1) - DEBT_LT(-1))/CP(-1) 0.01 2.3
DEBT_ST(-1)/CP(-1) -0.29 -4.9
NEW_HOUSING_LOANS(-1)/CP(-1) 0.35 6.5
D(YD/CP) 0.39 5.0
D(FTSE/CP) 1341 4.9
DLOG(HPI) 59481 3.0
D(GINI_COEFF(-1)) -75252 -0.6
R-squared 0.95
F-statistic 43.8
Durbin-Watson
1.92
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Credit Super-Cycles
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Number of Housing Loans p.a.per 1000 Population
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Ratio of Debt to Disposable IncomeHousehold Sector
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1.0
1.5
2.0
2.5
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Ratio of Mean House Priceto Disposable Income
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2.0
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10.0
12.0
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20.0
Baseline reflation
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Inequality High but StableGini Coefficient (IFS measure)
0.2
0.25
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0.35
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0.45
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Real GDP Forecasts (% per annum)
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GDP (CBR Forecast) 3% OBR reflation
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Unemployment Rate(% of labour force)
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CBR forecast OBR forecast ACTUAL
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Government Financial Deficit(% of GDP)
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
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2.0
CBR OBR
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Stock-Flow Consistency
𝒄𝒗 = 𝜶𝒚𝒅 + 𝜷𝒗where:
𝑐𝑣 is real consumption𝑦𝑑 is real disposable income𝑣 is real net wealth 𝑣 is the change in real wealth (defined to equal saving)
Disposable income, 𝑦𝑑, is the Haig-Simon definition of regular disposable income plus capital gains.
𝒗 = 𝒚𝒅 − 𝒄𝒗
In a stationary state, wealth is constant and consumption equals disposable income
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𝑣∗
𝑦𝑑∗=1 − 𝛼
𝛽
Stationary state wealth-income ratio
In a growing economy at rate g, the steady state wealth-income ratio is:
𝑣
𝑦𝑑=
𝛽
𝑔 + 𝛽1 − 𝛼 /𝛽
The savings ratio is:
𝑣
𝑦𝑑= 𝑔
𝛽
𝑔 + 𝛽1 − 𝛼 /𝛽
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9.0
Gross financial wealth Equity in Housing Total Wealth
Components of Household Wealth(% of Disposable Income)
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2.0
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3.5
4.0
4.5
5.0
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Wealth:Income Ratio (RHS) FT Allshare Index (LHS)
Ratio of Gross Financial Wealth to Disposable Incomes, and Real Equity Prices
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Conclusions
• Models like the OBR are determined by supply-side assumptions and are unenlightening about real-world prospects
• Without a multiplier, the model fails to predict the impact of austerity
• Our Keynesian model forecasts slower growth in GDP, rising unemployment and missed target for budget balance by 2020
• Credit cycles and the build-up of debt are vital in understanding what will happen. This requires stock-flow consistency