Macroeconomic Model Research Articles

Polymodern Economics

Polymodernity could be defined as cultural infrastructure. It describes the cultural evolution of the human species in four cultural codes and integrates them: indigenous, traditional, modern, and postmodern. These four cultural codes very much relate to group sizes, and they represent four different kinds of social interaction, cooperation, economy, moral values, media, and much more. In this article, I describe the economy as a structure of five integrated layers. The first is nature itself; the other four are economic models with different goals, dynamics, rules, measurements, criteria for success, and opportunities for sustainability and thriving. All five layers are present in thriving economies. This article presents a suggestion for a macro-economic model that can deliberately balance them.

Distributive cycles in the export-led growth model: On the macroeconomics of a pro-labor shift in Central and Eastern Europe

Abstract This article aims to reassess a stylized fact, increasingly well-established in the Comparative Political Economy scholarship, that Central and Eastern Europe (CEE) economies exhibit characteristics of the so-called export-led growth (ELG) model. We can confirm the ‘ELG in CEE’ hypothesis by developing and testing a Goodwinian distributive cycles’ macroeconomic model focused on the productivity–employment–wage share nexus. Moreover, our approach allows us to shed light on the apparent contradiction between ELG characteristics and the dynamic wage and employment growth experienced in the region after the global financial crisis (GFC) by exploring the possibility of a productivity-induced shift within the ELG model. We conclude that CEE countries experienced technical upgrading, which allows them to maintain export competitiveness despite a visible pro-labor shift in the income distribution.

CANVAS: A Canadian behavioral agent-based model for monetary policy

We develop the Canadian behavioral Agent-Based Model (CANVAS) that complements traditional macroeconomic models for forecasting and monetary policy analysis. CANVAS represents a next-generation modeling effort featuring enhancements in three dimensions: introducing household and firm heterogeneity, departing from rational expectations, and modeling price and quantity setting heuristics within a production network. The expanded modeling capacity is achieved by harnessing large-scale Canadian micro- and macroeconomic datasets and incorporating adaptive learning and simple heuristics. The out-of-sample forecasting performance of CANVAS is found to be competitive with a benchmark vector auto-regressive (VAR) model and a DSGE model. When applied to analyze the COVID-19 pandemic episode, our model helps explain both the macroeconomic movement and the interplay between expectation formation and cost-push shocks. CANVAS is one of the first macroeconomic agent-based models applied by a central bank to support projection and alternative scenarios, marking an advancement in the toolkit of central banks and enriching monetary policy analysis.

A socio-hydrology model for Water-Urban-Land-Population-Production Nexus

The competition between urbanization patterns, agricultural practices, population dynamics, and economic production intensifies under limited water resources. To tackle this pressing issue, the Chinese government has issued a strategy of "Basing four aspects on water resources." The strategy aims to guide the scopes and scales of urban extension, land cultivation, population capacity, and economic production based on the constraints imposed by water availability, referred to as the Water-Urban-Land-Population-Production (WULPP) Nexus. While there is literature dealing with various water-related Nexus, few studies focus on WULPP Nexus. To understand the co-evolution and conflicts of WULPP Nexus between social development and water management, the study proposed a comprehensive framework and corresponding socio-hydrology model to address the WULPP Nexus. The model integrates the WULPP Nexus with the macro-economic Input-Output model and a multi-objective optimization (MO) solution to comprehensively explore the dynamic interactions between water and social development from the perspective of water, land, labor, products, and capital. The proposed model was fully applied in Yinchuan (YC), a pilot city for Ecological Protection and High-quality Development in the Yellow River Basin, to examine its effectiveness and sensitiveness as a case study. The results reveal a strong positive correlation between population growth and socio-economic development, with urban expansion offering both benefits and trade-offs, while land cultivation presents the most significant trade-off with other objectives. Water availability, especially under consumption constraints, is crucial to improve outcomes in wet years and intensify trade-offs in dry ones. These findings underscore the importance of a balanced approach to social development and water management, offering valuable insights for sustainable development in water-scarce regions globally.

‘Let me tell you a story’: the politics of macroeconomic models

ABSTRACT Various social science literatures suggest that the general character of macroeconomic models reflects their assumptive base. A more specialist literature in the Weintraub-Boumans-Morgan tradition shows how the mathematics of those models moulds together logical implications of particular starting assumptions, insights from generally accepted theoretical propositions, and professionalised common-sense about how the world works. I go one step further in arguing that a process of narrative moulding operates in tandem with this mathematical moulding. A naming strategy provides the mathematical properties of macroeconomic models with economic labels to create the feeling that they are something more than a merely mathematical structure. A storytelling strategy then informs policy-makers of where the solution to the system of equations positions the outer limits of both political desirability and political possibility. Future dedicated research programmes into the narrative dimensions of macroeconomic models can be expected to shed further light on how theory models can masquerade as policy models and substitute models as surrogate models.

Learning integrated inflation forecasts in a simple multi-agent macroeconomic model

This paper implements a model with a population of heterogeneous macro forecasters. Their objectives are to forecast output and inflation, both inputs in standard New Keynesian macro models. The model is implemented by first calibrating the agents to professional forecasters at the micro level. Model runs then try to replicate both the dynamics, bias and cross sectional heterogeneity of forecasts and the economy. These are done both in a model with static forecasters, and one where the forecasters are learning from each other in a social fashion. We find that expectations about the inflation process which conjecture near random walk behavior can be self-fulfilling, yielding inflation volatility and persistence on the order of magnitude of U.S. macro data. However, our forecasting populations often fall short of the heterogeneity of predictions from survey data. In some cases, monetary policy can be used to shift the model from its volatile/persistent equilibrium over to a more stable, strongly mean reverting inflation rate.

The ECB's Solution to the Inflation Caused by the Russia-Ukraine Conflict

Abstract: The Russian-Ukrainian War saw a major escalation on February 24, 2022, when Russia invaded Ukraine, sparking the biggest battle in Europe since World War II. In addition to negatively affecting international relations, this lengthy conflict has had a significant negative influence on world markets, especially those in the Eurozone. The ongoing conflict has intensified inflationary pressures, necessitating the implementation of strong fiscal and monetary measures by the European Central Bank (ECB). This study analyzes the inflationary effect of the Russia-Ukraine crisis on the economies of the Eurozone and assesses the ECB's policies using macroeconomic models, such as the IS-PC-MR model. It explores the complex economic fallout, which includes unstable energy supply, higher industrial prices, and a decline in consumer confidence. The economy has stabilized largely because of the ECB's initiatives, which have included coordinated fiscal policies, interest rate hikes and asset purchase adjustments. Despite these initiatives, problems still exist, such as controlling the growing public debt and striking a balance between inflation management and economic growth. In order to strengthen economic resilience, the conclusion highlights the need for ongoing adaptation and international cooperation. Investments in integrated fiscal measures, diverse supply chains, and renewable energy are suggested as being crucial for long-term stability. The purpose of this study is to provide insights for future economic crisis management and to contribute to policy-making conversations.

FIRM SIZE AND BUSINESS CYCLES WITH CREDIT SHOCKS

AbstractI study the macroeconomic implications of firm heterogeneity in the presence of financial frictions. I build a business cycle model in which firm size is jointly determined by idiosyncratic productivity and collateral constraints. I estimate skewed idiosyncratic shocks and align the model with the evidence on firm size, leverage, and investment moments. The extent of resource misallocation is driven by a small number of highly productive but financially constrained firms. A credit shock severely affects such firms, further constraining their ability to borrow. This generates a large and persistent economic downturn that is comparable to the Great Recession.

Asymptotic behavior of solutions of nonlinear discrete systems in critical cases

AbstractThe paper is dedicated to the analysis of the asymptotic behavior of essentially nonlinear discrete systems whose linearization possesses eigenvalues on the unit circle. For these systems, the paper establishes sufficient conditions for the asymptotic stability regardless of terms higher than the third order. Moreover, it derives an asymptotic stability criterium for a reduced critical subsystem. The proof incorporates a constructive approach for deriving Lyapunov functions using the center manifold reduction and normal form method. The key result of the paper asserts that, given the obtained stability conditions, the solutions of the system converge to the origin with a polynomial decay rate. The paper also introduces a method for evaluating the coefficients of the decay rate estimate. To illustrate these findings, we apply the obtained result to analyzing nonlinear business cycle and predator-pray models.

Lack of identification of parameters in a simple behavioral macroeconomic model

Identifiability of the parameters is an important precondition for consistent estimation of models designed to describe empirical phenomena. Nevertheless, many estimation exercises proceed without a preliminary investigation into the identifiability of their models. As a consequence, the estimates could be essentially meaningless if convergence to the ‘true’ parameters is not guaranteed in the pertinent problem. We provide some evidence here that such a lack of identification is responsible for the inconclusive results reported in recent literature on parameter estimates for a certain class of nonlinear behavioral New Keynesian models. We also show that identifiability depends on the subtle details of the model structure. Hence, a careful investigation of identifiability should precede any attempt at estimation of such models.

Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway

Abstract Neither theory nor existing empirical evidence support the notion that wealth taxation reduces saving. Theoretically, the effect is ambiguous due to opposing income and substitution effects, and empirically, the effect may be masked by misreporting responses. Using geographic discontinuities in the Norwegian annual net-wealth tax and third-party-reported data on savings, I find that wealth taxation causes households to save more. Each additional NOK of wealth tax increases annual net financial saving by 3.76, implying that households increase saving enough to offset both current and future wealth taxes. This positive effect on saving is primarily financed by increases in labor earnings. These responses are the combination of small negative effects of increasing the marginal tax rates and larger positive effects of increasing average rates. My findings imply that income effects may dominate substitution effects in household responses to rate-of-return shocks, which has implications for both optimal taxation and macroeconomic modeling.

The Healthcare Workforce Shortage of Nurses and Physicians: Practice, Theory, Evidence, and Ways Forward.

The healthcare sector is ubiquitously plagued by workforce shortages in economies around the globe. The fragility of this structural shortage becomes apparent when external shocks, such as the COVID-19 pandemic, exacerbate the lack of workers in clinical practice. In this article, we summarize current trends in healthcare workforce development across the globe, review theoretical concepts of workforce shortages, and discuss policies to address them. In practice, developed countries often address workforce shortages with targeted migration policies. However, targeted workforce migration policies only intensify workforce shortages in low-and middle-income countries. Theoretical macroeconomic models suggest that supply shortages may result from too low wages, supply lagging behind demand, and social perception. Changes in the wage rate cannot sufficiently increase the supply of health professionals as scholars find inelastic wages for physicians and nurses. Nonpecuniary factors such as working conditions, job satisfaction, and intrinsic motivation are at least equally important as financial incentives. In conclusion, increased wages can only be part of a heterogeneous policy plan to address shortages. Migration and retirement levels of health professionals can temporarily mitigate workforce shortages but rarely change the underlying systemic issues. Increasing the number of places available in medical and nursing schools while also improving, both, financial and nonfinancial incentives for employees are long-term structural policy options.

Economic Openness and the Behaviour of Great Ratios in G20 Countries

Most of the macroeconomic models suggest that great ratios of economics should be stable in the long term. Keeping the theoretical consequences in mind, the present study investigates the order of integration of two great ratios, viz. consumption–output and investment–output ratios. The study employs both mean shift and trend shift unit root tests with a structural break to examine the stationarity property of great ratios. This article attempts to analyse the relationship between economic openness and the behaviour of great ratios. Results of the study indicate a balanced growth path for 10 out of 18 G20 countries considered in our analysis. Findings show that countries that have a deficit trade balance with surplus foreign direct investment are more likely to demonstrate a balanced growth path. The multivariate analysis shows evidence in support of the balanced growth hypothesis in 13 of the 18 G20 countries. Of the 18 countries analysed, 8 internationally open and 6 financially open countries provide support for the balanced growth path. JEL: C20, E20, O50

Consumption tax cuts vs stimulus payments

Recent work shows that in macroeconomic models with non-Ricardian consumer behavior, uniform transfers are equivalent to interest rate cuts. That is, policymakers can use stimulus payments to substitute for conventional monetary policy when, say, the zero lower bound on short-term rates binds. We argue that in the same class of models, temporarily reducing consumption taxes delivers more stimulus than transfers — at the same cost to the taxpayer. Consumption tax cuts activate both income and substitution channels and prompt a strong response from all consumers across the wealth distribution. Simulating these policies in a quantitative heterogeneous agent New Keynesian model, we find output expands twice as much.

Systematic Review of Consumer Price Index Methods and Software: Evidence from ASEAN Countries and Scholarly Research

This comprehensive systematic review provides an in-depth analysis of consumer price index (CPI) methods and software use in Asian countries. The study looks at the practises used by countries to calculate CPI, with an overwhelming preference for monthly calculations, reflecting the dynamic economic growth of the region. The use of household expenditure surveys and weighting sources ensures that CPI accurately captures changes in consumer spending patterns and the relative importance of different goods and services. Applications of CPI in Asian countries cover a wide range, including indexation of wages, pensions and social security contributions, as well as its central role as a main indicator for monetary policy decisions, macroeconomic modelling and various analytical purposes. The systematic review highlights various calculation methods for CPI, including the Carli index, the Laspeyres index, the chained Jevons index and the Dutot index, each of which has different strengths and weaknesses that affect the accuracy and reliability of CPI's measurements. In terms of software, the study encounters a range of applications, including Microsoft Excel, SAS, STATA, R, Python, EViews and SPSS, each offering versatile capacities for statistical analysis and econometric modelling. In addition, the study explores potential software alternatives such as Gretl, Julia, EpiData, GNU Octave, Tableau, Matplotlib, Seaborn and QGIS, whose suitability for CPI calculations should be considered. The research findings highlight the importance of transparent and accurate CPI calculations in shaping effective policy decisions. Policy makers can use these findings to refine CPI measurements to enable well-informed strategies to steer the economy. The study suggests avenues for future research that include assessing specific impacts of CPI calculations, further developing software tools, and incorporating consumer perceptions into CPI development.

Automation, Bargaining Power, and Labor Market Fluctuations

We argue that the threat of automation weakens workers’ bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a business cycle model with labor market search frictions, generalized to incorporate automation decisions. In the model, procyclical automation threats create endogenous real wage rigidity that amplifies labor market fluctuations. The automation mechanism is consistent with empirical evidence. It is also quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models. (JEL E13, E24, E32, J31, J63, J64)

Теория эндогенного роста: исследование исторических предпосылок и ретроспективных особенностей эволюции в рамках отдельных макроэкономических парадигм и моделей экономического роста

To date, the main research on macroeconomic theory identifies five main factors of economic growth that will be decisive in the coming decades: population and human capital; capital and capital markets; globalization and trade; technology and innovation, as well as new frontiers for productivity growth. It remains an undeniable fact that innovations stimulate modern economic growth. At the same time, in the process of its evolution, any macroeconomic paradigm faces certain limitations associated with changes in the socio-economic system of society, and as a result, there is a need to rethink what are the historical prerequisites and retrospective features of the evolution of the endogenous macroeconomic theory of economic growth. The purpose of the article is to study the nature of similarities and contradictions, and the nature of the mutual influence of various macroeconomic paradigms within the framework of the evolution of the endogenous macroeconomic theory of economic growth; the roles of generalizing and separating factors that cause the emergence and development of individual elements of this macroeconomic paradigm. The scientific novelty of the article is presented by the author’s new critical view of the study of historical prerequisites and retrospective features of the evolution of individual macroeconomic theories and models of economic growth, especially the endogenous growth model, in order to show that the nature of innovation itself has an ambiguous assessment from the side of macroeconomic science.

Macroeconomic Analysis of Social Health Insurance Implementation in Kazakhstan

Over the past three decades, Kazakhstan put a lot of efforts and resources into implementation of the Social Health Insurance. Debates on health policy often focuses on contribution rates in SHI that should limit the growth of out-of-pocket spending. We investigate a central issue to the debates: are the contribution rates stipulated by the law sufficient to minimize the out-of-pocket health payments? We develop a simple dynamic stochastic general equilibrium (DSGE) model based on over-lapping generations macroeconomic model (OLG) to describe the process of healthcare reforms in Kazakhstan. The numeric results argue that current contribution rates will not be enough to reduce the share of ou-of-pocket health payments in the economy. On contrary, optimal inter-temporary consumption-saving decision of households may bring us to the optimal composition of total spending that shifts toward health, and the out-of-pocket health expenditures can easily exceed current level of 40 percent.

Modelling the green transition of the Chinese economy

This paper develops a stock–flow consistent (SFC) macroeconomic model with an energy sector for China to investigate the effect of green policies on green transition and the economy. We provide an analytical solution for green transition that illustrates the relative cost of using conventional energy with respect to renewable energy to determine the share of renewable energy and how the development of the energy sector promotes green transition. Our solution also demonstrates the necessity of green policies for a green transition. We calibrate the model to the national determined contributions (NDCs) scenarios from the Network for Greening the Financial System (NGFS) and run simulations from 2019 to 2035. The results show carbon taxes stimulate green transition but have a negative impact on the economy, accompanied by a reduction in economic growth, current account deficit and a rise in inflation. Carbon taxes deteriorate firms’ balance sheets. Governments benefit from carbon taxes in the short run but face a higher public debt to GDP ratio in the long run. Carbon taxes reduce carbon intensity and carbon emissions. We also compared the effect of green fiscal policy to conventional fiscal policies financed by carbon taxes (carbon rebate). Green subsidies benefit economic growth more effectively. They reduce inflation caused by carbon taxes and stimulate the green transition further.

The impact of environmental regulations on competitiveness and carbon leakage

A substantial amount of literature investigates environmental regulations and their effect on competitiveness. This often leads to a comparison of the two competing hypotheses: the pollution haven hypothesis and the Porter hypothesis. The former suggests that environmental regulations can positively affect country level competitiveness through green research and development, while the latter proposes that environmental regulations negatively affect competitiveness through higher production costs. In this paper, we argue that the comparison between these two hypotheses should not only be limited to competitiveness alone but should also include a focus on carbon leakage. We use a two-area stock–flow consistent macroeconomic model calibrated to match key variables for the Danish economy. We incorporate the effects of both the pollution haven and Porter hypotheses within the model. As an environmental regulation is implemented in the Danish economy, we find an immediate negative effect on competitiveness, but as the innovational process is allowed time to play in, as suggested by the Porter hypothesis, the effect on competitiveness turns positive. Furthermore, we find negative carbon leakage rates when the effects of the Porter hypothesis are included together with the pollution haven hypothesis, contradicting the quite large positive estimates found for small open economies in the current literature. We find that the negative carbon leakage rates are a result of including the empirically validated effects of the Porter hypothesis, which are excluded in the current literature.