THE ECONOMETRICS OF MACROECONOMIC MODELLING

The wage-price model

We first model the long-run equilibrium equations for wages and prices based on the framework of Chapter 5. As we established in Section 5.4 the long-run equations of that model can be derived as a particular identifica­tion scheme for the cointegrating equations; see (5.19)-(5.20). Second, we incorporate those long-run equations as equilibrium correcting terms in a dynamic two-equation simultaneous core model for (changes in) wages and prices.

9.2.1 Modelling the steady state

From equations (5.19)-(5.20), the variables that contain the long-run real wage claims equations are collected in the vector [wt pt at pit ut]'. The wage variable wt is average hourly wages in the mainland economy, excluding the oil produc­ing sector and international shipping. The productivity variable at is defined accordingly—as mainland economy value added per man hour at factor costs. The price index pt is the official consumer price index. Import prices pit are measured as the deflator of total imports. The unemployment variable ut is the rate of open unemployment, excluding labour market programmes.

In addition to the variables in the wage-claims part of the system, we include (as non-modelled and without testing) the payroll-tax t1t, indirect taxes t3t, energy prices pet, and output yt—the changes in which represent changes in the output gap, if total capacity follows a trend. Institutional variables are also included. Wage compensation for reductions in the length of the work­ing day is captured by changes in the length of the working day Aht—see Nymoen (19896). The intervention variables Wdumt and Pdumt are used to capture the impact of incomes policies and direct price controls. This system, where wages and prices enter with three lags and the other main variables enter with one or two lags, is estimated over 1972(4)-2001(1).

We impose restrictions on the steady-state equations (5.19)-(5.20), by assuming no wedge and normal cost pricing. We also find empirical support that changes in indirect taxes are off-set in long-run inflation with a factor of 50%.

Table 9.1

The estimated steady-state equations

The estimated steady-state equations (9.1)-(9.2) w = p + a — 0.11m (0.01)

p = 0.73(w +11 — a)+ 0.27pi + 0.5t3 (0.08)

Cointegrated system

46 parameters

wt

pt

System

^normality (2)

4.21[0.12]

2.48[0.29]

FHETx2 (22, 83)

1.01[0.46]

1.28[0.21]

^overidentification (8)

13.21[0.10]

^normality (4)

5.14[0.27]

FHetx2 (66,138)

0.88[0.72]

image181

0.05

1985

1990

1995

2000

---- f ± 2s. e

______

-

-

1985 1990 1995 2000

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