the standard multiplier properties of the HERMIN model.3 However, the model also
has neoclassical features, mainly associated with the supply sub-component. Thus,
output in manufacturing is not simply driven by demand. It is also influenced by
price and cost competitiveness, where firms seek out minimum cost locations for
production (Bradley and Fitz Gerald, 1988). In addition, factor demands in
manufacturing and market services are derived using a CES production function,
where the capital/labour ratio is sensitive to relative factor prices. The incorporation
of a structural Phillips curve mechanism in the wage bargaining mechanism
introduces further relative price effects.
The schematic structure of the HERMIN model is illustrated in Figure 1. The
national accounts define three ways of measuring GDP: the output basis, the
expenditure basis and the income basis. On the output basis, HERMIN disaggregates
this into four sectors: manufacturing (OT), market services (ON), agriculture (OA)
and the public (or non-market) sector (OG). On the expenditure side, HERMIN
disaggregates into five components: private consumption (CONS), public
consumption (G), investment (I), stock changes (DS), and the net trade balance
(NTS). National income is determined on the output side, and disaggregated into
private and public sector elements.
Since all elements of output are modelled, the output-expenditure identity is used to
determine the net trade surplus/deficit residually. The output-income identity is used
to determine corporate profits residually. Finally, the equations in the model can be
classified as behavioural or identity. In the case of the former, economic theory and
calibration to the data are used to define the relationships. In the case of identities,
these follow from the logic of the national accounts that have important consequences
for the behaviour of the model as well.
3 Expectations in the HERMIN model are assumed to be autoregressive (i.e., static or backward-
looking). It should be noted that the Commissions own QUEST model contains forward-looking (or
model consistent) expectation mechanisms. These result in policy “crowding out” and much smaller
multipliers. But since the bulk of CSF expenditures are mainly on public goods (e.g., physical
infrastructure and education/training), it might be questioned if “crowding out” is fully relevant.