The Leontief-Duchin-Szyld dynamic input-output model with reduction of idle capacity and modified decision function

Abstract

The paper discusses modifications of the dynamic input-output model as formulated by Leontief, Duchin and Szyld. On the basis of theoretical arguments and empirical considerations a modification with respect to two properties of the model is proposed. Firstly, the reformulated model allows for the explicit retirement of idle capacity, a mechanism which is not included in the original model. Secondly, the decision function ruling the process of the implementation of capacity expansion investment is modified using the concept of capacity reserve. In ex post simulations for Germany it is demonstrated that the modified model is better in tracing the actual development of gross output and investment variables on the aggregate as well as on the sectoral level. It should be noted that the improved goodness of fit is at the expense of a complication of the model and a need for a kind of calibration process, if the model is implemented for different countries or different periods of time.