The Financial Sector of the London Business School Model

Abstract

There are three domestic private non-bank sectors: industrial and commercial companies; the personal sector; and the pension funds plus insurance companies. However, the dynamic properties of the whole LBS model, including the parameters described, were studied by simulation. In contrast to the company and personal sectors, the pension fund and insurance company sector was assumed to choose among only six assets and only two of these foreign currency short-term assets and foreign currency securities were subject to rationing during the estimation period. The estimates are based on a model structure that imposes many restrictions and which were not tested. This chapter derives the market-clearing asset prices and then describes some simulation results from the financial model combined with the full LBS macro-econometric model of the UK. Pension and insurance fund portfolios are dominated by long-term assets and the interest rate change causes an immediate switch in their holdings.