Macroeconomic modelling and the policy of restraint in the Netherlands

Abstract

On two occasions a major change in the structure of Dutch macroeconomic policy models has contributed to a broad political consensus on the policy of restraint pursued by the Dutch government. The first change occured in the mid-1970s, when a clay-clay vintage model which endogenizes productive capacity and labour demand was added to the traditional Keynesian demand oriented short-term policy model. This new model provided the argument for wage restraint as a remedy for the unemployment problem. At the beginning of the 1980s the second change was the addition of a fully fledged monetary block to the models, which was intended to support the crowding out argument for the policy of cutting government expenditure. This paper investigates the validity of the above arguments by simulating the policy of restraint with three stylized representations of the three generations of Dutch policy models. These simulations and a sensitivity analysis on the crucial parameters of the models show that the models provide more support for a policy of wage restraint than for a policy of reducing government expenditure.