A Macro-Economic Policy Model of the United Kingdom 1855-2014 with Investment, Share Prices and 'Animal Spirits'.

Abstract

This paper presents a long-term model of the UK economy. It builds on a stream of modelling that seeks to describe the properties of an economy with a non-linear differential equation system the parameters of which are estimated using a continuous-time Full Information Maximum Likelihood (FIML) estimator which takes into account the fact that while models, like economies, are continuous, data are discrete. The dynamic and other properties of the estimated model may then be analysed using appropriate mathematical techniques. The results include successfully embedded hypotheses about the source and effects of a measure of 'Animal Spirits', thereby resolving a previously intractable gap between economic theory and empirical representation of real economies. The approach here involves using a simple but logically complete structural model of the UK economy. It builds on similar modelling at the London School of Economics in the late 1960s and 1970s, at the IMF and Reserve Bank of Australia in the 1970s and continuing work there and elsewhere from the 1980s. All this work used structurally complete models with different levels of detail.