Medium-term planning with a multisectoral dynamic model of the U.K. economy

Abstract

Abstract In this paper a hybrid combination of non-linear programming and econometric modelling techniques is proposed to derive optimal economic plans from largo dynamic econometric models. The required algorithms are discussed and applied to a multi-sectoral dynamic model of the U.K. economy. It is argued that the non-linear programming framework for the formulation of economic policy is superior to the conventional steering approach, since it takes account of asymmetry in preferences and distinguishes between long-term optimality and short-term feasibility considerations. The optimal reflationary mix shows marked improvements in welfare and at the same time ensures feasibility of selected target variables. The results also show that the problems of slow output and productivity growth are located in a few key industries and that the reflationary package does not entirely remove the problems of import penetration and secular decline of Britain's manufacturing industry.