QUEST II. A Multi-Country Business Cycle and Growth Model



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Above we considered the effects of demand shocks in the model. To illustrate the supply
side of the model we look in this section at a technology shock and analyse the effects of an
increase in technical progress. In this scenario we shock labour augmenting technical
progress
71W in all European countries by 1 per cent permanently. It is assumed that
monetary authorities target the money supply and that exchange rates are flexible.

A permanent improvement in productivity raises potential output and boosts growth
immediately. The results in Table 12 show that under certain assumptions concerning wage
behaviour, namely that unemployment benefits are indexed to real wages, the long run
solution of the model to a percent change in labour augmenting technical progress exhibits
standard features of the neoclassical growth model. A new steady state will be reached with
a percentage increase in GDP and real wages close to the percentage increase in
productivity11 but no change in the unemployment rate. The long run results would of course
be different under alternative indexation rules for benefits. The impact multiplier is around a
quarter but increases fast in the following years. It would take the economy about 3 years to
complete half of the adjustment.

Table 12: Effects of EU wide productivity shock

(permanent increase in labour-augmenting technical progress of 1%)

year:

EU15:________________

1

2

3

4

5

6

7

8

9

10

30

GDP

0.23

0.44

0.54

0.60

0.64

0.67

0.69

0.72

0.74

0.76

0.99

potential.private.GDP

0.64

0.65

0.66

0.68

0.69

0.71

0.73

0.75

0.77

0.79

1.01

private.consumption

0.37

0.58

0.63

0.65

0.67

0.69

0.71

0.73

0.75

0.76

0.93

private.investment

0.13

0.50

0.73

0.81

0.82

0.83

0.84

0.85

0.86

0.87

1.03

total. public.expenditure

0.24

0.43

0.54

0.60

0.64

0.67

0.69

0.72

0.74

0.76

1.01

employment

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

-0.01

0.03

real.wage.costs

0.26

0.45

0.56

0.62

0.66

0.69

0.71

0.73

0.75

0.77

0.96

price.level

-0.30

-0.49

-0.60

-0.66

-0.69

-0.72

-0.74

-0.77

-0.79

-0.80

-1.01

consumer.price.level

-0.32

-0.52

-0.63

-0.69

-0.72

-0.75

-0.77

-0.78

-0.80

-0.81

-0.95

dollar.exchange.rate

-0.57

-0.72

-0.78

-0.81

-0.82

-0.82

-0.82

-0.82

-0.82

-0.82

-0.68

real .exchange .rate

-0.28

-0.23

-0.19

-0.15

-0.13

-0.10

-0.08

-0.06

-0.03

-0.01

0.33

real.eff.exch.rate

-0.03

-0.03

-0.02

-0.01

0.01

0.02

0.03

0.04

0.05

0.06

0.23

money

-0.30

-0.28

-0.29

-0.29

-0.29

-0.29

-0.29

-0.28

-0.28

-0.28

-0.23

short.rate *

-0.22

-0.08

-0.04

-0.01

0.00

0.00

0.00

0.01

0.01

0.01

0.01

long.rate *

0.00

0.00

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

real.short.rate *

0.01

0.05

0.04

0.03

0.03

0.03

0.03

0.03

0.03

0.03

0.01

inflation *

-0.30

-0.20

-0.11

-0.06

-0.04

-0.03

-0.02

-0.02

-0.02

-0.02

0.00

unemployment.rate *

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

0.01

-0.03

debt. (as % of GDP) *

-0.02

-0.01

0.00

0.01

0.01

0.00

0.00

0.00

0.00

0.00

0.00

deficit. (as % of GDP) *

-0.01

0.02

0.01

0.00

-0.01

0.00

0.01

0.01

0.01

0.01

0.00

trade.bal (as % of GDP)
*

-0.04

-0.06

-0.05

-0.04

-0.03

-0.02

-0.02

-0.01

-0.01

-0.01

-0.01

Note: percentage differences from base (except those marked *: absolute differences from base). Money in EU15 is aggregated
in DMs and can therefore differ from zero despite money targetting in each individual country.

11 There can be minor deviations because of terms of trade effects.

31



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