The Econometric Model

Abstract

The aim of this chapter is to formulate and test a large-scale, multisectoral, econometric model for the UK in order to apply the results of the stochastic optimal control techniques developed earlier. Our final purpose is to formulate an investment plan for the UK economy, together with a price- wage plan to regulate the economy. The purpose of the model should determine its basic structure. Therefore, because it is intended for a planned economy, the structure should not reflect an aggregative, Keynesian, expenditure-type model, where the major emphasis is on the financial and expenditure aspects of the economy. In order for the plan to be meaningful, the model should be multisectoral. Again, as our purpose is to apply a control technique to solve the energy problem, the major emphasis must be on the energy sector of the economy. It is also desirable that the model have a dynamic structure that is reasonably non-controversial, i.e. that falls into line with either Keynesian or post-Keynesian theory. We have adopted a structure which is not Keynesian, for the reason noted above, but which represents a world where major emphasis is on the real sector of the economy. Our main purpose is physical planning, thus, except for prices and wages, we have ignored the monetary and fiscal aspects of planning. To set the monetary and fiscal instruments to attain the physical plan is a research task in itself, and beyond the scope of our present study.