The wage curve NAIRU
Without making further assumptions, and for a given rate of unemployment, there is no reason why wbq t in (5.5) should be equal to wf t in (5.6). However, there …
An example: modelling the household sector
The complete Haavelmo distribution function—for example, the joint distribution (2.1) of all variables of the macro model—is not tractable and hence not an operational starting point for empirical econometric analysis. …
A main-course interpretation
In Chapter 3 we saw that an important assumption of Aukrust’s main-course model is that the wage-share is I(0), and that causation is one way: it is only the exposed …
Cointegration, causality, and the Phillips curve natural rate
As indicated earlier, there are many ways that a Phillips curve for an open economy can be derived from economic theory. Our appraisal of the Phillips curve in this section …
Wage-price dynamics: Norwegian manufacturing
In this section, we return to the manufacturing data set of Section 4.6 (Phillips curve), and 5.5 (wage curve). In particular, we recapitulate the cointegration analysis of Section 5.5: 1. …
The case for macroeconometric models
Macroeconometric models, in many ways the flagships of the economics profession in the 1960s, came under increasing attack from both theoretical economics and practitioners in the late 1970s. The onslaught …
Cointegration and identification
In Chapter 3, we made the following assumptions about the time-series properties of the variables we introduced: nominal and real wages and productivity are I (1), while, possibly after removal …
The aggregate consumption function
The model for aggregate consumption in B&N satisfies the criteria we listed in Section 2.3. They provide a model in which cointegration analysis establishes that the linear relationship cht = …
Comparison with the wage-curve NAIRU
In Chapter 5 we saw that the model with bargained wages and price-setting firms defined a certain level of unemployment denoted uw at which the conflicting real wage claims were …
Is the Phillips curve consistent with persistent changes in unemployment?
In the expressions for the main-course NAIRU (4.5) and (4.10), wphl1 depends on parameters of the wage Phillips curve (4.1) and exogenous growth rates. The coefficients of the unemployment equation …
The New Keynesian Phillips curve
Hitherto, we have considered, models that have a unique backward solution, given a set of initial conditions. Even though individual variables may be dominated, by unit roots, models defined in …
Methodological issues (Chapter 2)
The specification of a macroeconomic model rests in both economic theory and the econometric analysis of historical data. Different model builders place different weight on these two inputs to model …
Cointegration and Norwegian manufacturing wages
We analyse the annual data set for Norwegian manufacturing that was used to estimate a main-course Phillips curve in Section 4.6. We estimate a vector autoregressive model (VAR), check for …
Rival models
Financial deregulation in the mid-1980s led to a strong rise in aggregate consumption relative to income in several European countries. The pre-existing empirical macroeconometric consumption functions in Norway, which typically …
Comparison with the wage Phillips curve NAIRU
In the case of no equilibrium correction in nominal wage-setting, 9w = 0, equation (6.1) simplifies to Awt = Cw + фwpApt + фwqAqt - yut-1 + £w, t, (6.42) …
Estimating the uncertainty of the Phillips curve NAIRU
This section describes three approaches for estimation of a ‘confidence region’ of a (time independent) Phillips curve NAIRU. As noted by Staiger et al. (1997) the reason for the absence …
The NPCM defined
Let pt be the log of a price level index. The NPCM states that inflation, defined as Apt = pt — pt_i, is explained by EtApt+i, expected inflation one period …
The supply-side and wage — and price-setting (Chapters 3—8)
In the course of the 1980s and 1990s the supply-side of macroeconometric models received increased attention, correcting the earlier overemphasis on the demand-side of the economy. Although there are many …
Aggregate wages and prices: UK quarterly data
Bardsen et al. (1998) present results of aggregate wage and price determination in the United Kingdom, that can be used to illustrate the third identification scheme above. In the quarterly …
Is modelling subsystems and combining them to a global model a viable procedure?
The traditional approach to building large-scale macroeconometric models has been to estimate one equation (or submodel) at a time and collect the results in the simultaneous setting. Most often this …
Do estimated wage-price models support the NAIRU view of equilibrium unemployment?
The analysis of this chapter has shown that there is no logical reason why dynamic stability of real wages and inflation should imply or ‘require’ a supply-side determined NAIRU. Conversely, …
Inversion and the Lucas critique
As pointed out by Desai (1984), the reversal of dependent and independent variables represents a continuing controversy in the literature on inflation modelling. Section 4.1.1 recounts how Lucas’s supply curve …
NPCM as a system
Equation (7.1) is incomplete as a model for inflation, since the status of xt is left unspecified. On the one hand, the use of the term forcing variable, suggests exogeneity, …
The transmission mechanism (Chapters 9 and 10)
All macroeconometric models contain a quantitative picture of how changes in nominal variables bring about real effects, the so-called transmission mechanism. Sometimes representations of the transmission mechanism are the main …
Wage-price dynamics
This chapter discusses the modelling of the wage-price subsystem of the economy. We show that under relatively mild assumptions about price - and wage-setting behaviour, there exists a conditional steady …
Inflation in open economies:. the main-course model
The chapter introduces Aukrust’s main-course model of wage - and pricesetting. Our reconstruction of Aukrust’s model will use elements both from rational reconstructions, which present past ideas with the aid …
Empirical wage equations
Empirical models of Nordic manufacturing wage formation are reviewed and updated in Nymoen and Rpdseth (2003). Their results for Denmark, Finland, Norway, and Sweden strongly reject the Phillips curve specification. …
Lucas critique
Lucas’s 1976 thesis states that conditional econometric models will be prone to instability and break down whenever non-modelled expectations change. This section establishes the critique for a simple algebraic case. …
Sensitivity analysis
In the following, we will focus on the results in GGL for the Euro area. Our replication of their estimates is given in (7.12), using the same set of instruments: …
Forecast properties (Chapter 11)
When studies of macroeconometric models’ forecast performance started to appear in the 1960s and 1970s, it was considered a surprise that they were found to be outperformed by very simple …
Nominal rigidity and equilibrium correction
The understanding that conflict is an important aspect to take into account when modelling inflation in industrialised economies goes back at least to Rowthorn (1977), and has appeared frequently in …
Cointegration
Equation (3.1) captures the price taking behaviour characterising the exposed industries, and (3.2)-(3.3) define foreign prices of traded goods (pft) and labour productivity as random walks with drifts. Equation (3.4) …
Aggregate wage-price dynamics in the United Kingdom
In Section 5.6 we showed that, using aggregate wage and price data for the period 1976(3)-1993(1), the following long-term wage and price equations were identified (see Table 5.3). (1) w …
Model-based vs. data-based expectations
Apparently, it is often forgotten that the ‘classical’ regression formulation in (4.31) is consistent with the view that behaviour is driven by expectations, albeit not by model-based or rational expectations …
Methodological issues of large-scale macromodels
The chapter focuses on methodology and describes the roles of statistics and of economic theory in macroeconomic modelling. Building on a long tradition, we suggest an approach to macroeconometric modelling …
