Category THE ECONOMETRICS OF MACROECONOMIC MODELLING

The NAWRU

The NAWRU indicator has been used extensively by the OECD and others on several important issues, including policy evaluation and estimation of potential output and the structural budget balance; see Holden and Nymoen (2002) for a discussion. Elmeskov and MacFarland (1993) and Elmeskov (1994) define the non-accelerating wage rate of unemployment, NAWRU, in terms of a stylised wage-pressure equation

Д2^ = – ct(Ut – UNAWRU), ct > 0, (6.45)

where UNAWRU is the NAWRU level of unemployment. In words, it is assumed that wage inflation is affected in a linear way by the difference between the actual level of unemployment and the NAWRU. Equation (6.45) can either be
seen as a vertical wage Phillips curve (dynamic homogeneity is imposed); or as representing the heuristic dynamics of the wage curve ...

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An empirical open economy Phillips curve system

In this section, we first specify and then evaluate an open economy Phillips curve for the Norwegian manufacturing sector. We use an annual data set for the period 1965-98, which is used again in later sections where competing models are estimated. In the choice of explanatory variables and of data trans­formations, we build on existing studies of the Phillips curve in Norway, cf. Stplen (1990, l993). The variables are in log scale (unless otherwise stated) and are defined as follows:

wct = hourly wage cost in manufacturing; qt = index of producer prices (value added deflator); pt = the official consumer price index (CPI); at = average labour productivity;

tut = rate of total unemployment (i. e...

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The roles of statistics and economic theory in macroeconometrics

Macroeconometrics draws upon and combines two academic disciplines— economics and statistics. There is hardly any doubt that statisticians have had a decisive influence on quantitative economics in general and on modern macroeconometric modelling in particular.

2.2.1 The influx of statistics into economics

The history of macroeconomic modelling starts with the Dutch economist Jan Tinbergen who built and estimated the first macroeconometric models in the mid-1980s (Tinbergen 1937). Tinbergen showed how one could build a system of equations into an econometric model of the business cycle, using economic theory to derive behaviourally motivated dynamic equations and statistical methods (of that time) to test them against data...

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Cointegration, long-run multipliers, and the steady state

There is a correspondence between the elasticities in the equations that describe the steady-state growth paths and the elasticities in the cointegrating relation­ships (5.11) and (5.14). However, care must be taken when mapping from one representation to the other. For example, since much applied work pays more attention to wage-setting (the bargaining model) than to price-setting, it is often implied that the coefficient of unemployment in the estimated cointegrat­ing wage equation also measures how much the steady-state growth path of real wages changes as a result of a permanent shift in the rate of unemploy­ment. In other words, the elasticity in the cointegrating equation is interpreted as the long-run multiplier of real wages with respect to the rate of unemploy­ment...

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Summary

Unlike the other approaches to modelling wages and prices that we dis­cuss in the next chapters, Aukrust’s model (or the Scandinavian model for that matter) is seldom cited in the current literature. There are two rea­sons why this is unfortunate. First, Aukrust’s theory is a rare example of a genuinely macroeconomic theory that deals with aggregates which have precise and operational definitions. Moreover, Aukrust’s explanation of the hypothesised behavioural relationships is ‘thick’, that is, he relies on a broad set of formative forces which are not necessarily reducible to specific (‘thin’) models of individual behaviour...

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Do NAWRU fluctuations match up with structural changes in wage formation?

We have estimated equilibrium correction wage equations:

Awct = во – ві(wc – q – a)t-i – вои + вхХг + £wt, (6.48)

which are similar to, for example, Nymoen (1989a). The results are for the manufacturing sectors of each country, and draw on the analysis of Nymoen and Rpdseth (2003). For Norway, the variables have been defined in earlier sections (see Section 4.6), and the data set contains the same variables for the other countries: wc = log of hourly wage cost in manufacturing; q = log of the index of value added prices; a = log of value added labour productivity; u = log of the rate of unemployment.[49] The terms exXt should be viewed as composite, containing both growth rate variables, for example, the rates of change in the CPI, and variables that capture the impact of change...

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