An Application of the Generalized Inverse in Input-Output and Macroeconomic Analysis

Abstract

A dynamic input-output and macroeconomic model is constructed for the Netherlands. It is overdetermined in that there are 34 equations for its 33 endogenous variables. Policy analysis is performed using the generalized inverse. Implications of either retaining or dropping a constraint on the balance of payments are examined. Its exclusion gives the more familiar fullydetermined case having 33 equations in as many variables, but now the balance of payments may well be at inappropriate levels. The effect of shifts in indirect taxes is calculated. The overdetermined model responds very differently from the fullydetermined one. In fact, a reversal in changes, among other variables, in unemployment, in wage rate, and in prices of exports and private consumption takes place. The main conclusion is that earlier ideas about policymaking which are based on fullydetermined models, may have to be revised completely when the overdetermined form is more appropriate