Specification of the Aggregate Econometric Equations
- 33 Downloads
In the following we specify the deterministic parts of the aggregate econometric equations (to be linked via (19º) to observables). As our focus is on the production sector, i.e. firms’ decisions on goods supply, labor demand and investment, we keep the specification of labor supply and goods demand as simple as possible. The labor supply equation is in the spirit of the intertemporal substitution approach (section 5.1); as all its determinants are exogenous and no spillover effect is involved, it plays a rather peripherical role in the model. Goods demand is assumed to depend on aggregate income Y, the real interest rate, an activity indicator for the world economy and the ratio of Swiss output prices to prices of foreign competitors (section 5.2). This equation can be viewed as reduced form of a more detailed specification of goods demand and foreign trade. It incorporates — by the inclusion of Y as an explanatory variable — a Keynesian spillover or “multiplier” effect whose strength varies however depending on the aggregate rationing situation. The equations for notional labor demand and goods supply are formulated on basis of vintage production function. The adaptation of the production apparatus to changing factor costs is thus specifically connected to investments in new equipment and scrapping of old equipment. In the short run, capital equipment can be regarded as given; firms have to decide “down” to which marginal productivity level they can operate existing equipment profitably. However, as we want to explain the development of labor demand and output supply beyond the short run, we have to analyse the investment process itself. This is done in connection with a Malinvaud-type investment equation, involving “pressure of demand”, “profitability” and “relative prices” as determinants (section 5.3).
KeywordsLabor Supply Real Interest Rate Labor Demand Relative Prex Unit Labor Cost
Unable to display preview. Download preview PDF.