Keynesian Dynamics and the Wage-Price Spiral:Estimating a Baseline Disequilibrium Approach



H0 : P = 11 v.s. H1 : P =12

Chi-Squared(25)= 42.86003 with Significance Level 0.20055

H0 : P = 10 v.s. H1 : P =11

Chi-Squared(25)= 52.30518 with Significance Level 0.03868

According to these test results we use VAR(12) to represent a general model that should
be an approximation of the DGP. Because in the dynamic system of (1) - (5) the variable
ukbpt is treated as exogenous, we factorize the VAR(12) process into a conditional process
of
dwt ,dpt ,Vtl ,Vtc ,rt given ukbpt and the lagged variables, and the marginal process of
ukbpt given the lagged variables:

dwt
dpt
Vtl
Vtc
rt


C ci


c

c2

c*

c3

c4

V5 /


pl
b2
I1
b
3
b4

V5


d74 +

)


ai
a2

a3

ukpbt

a4

a5


(14)


a ailk

P     a2l k

+ ∑  αk

k=1    a41 k

a51 k


al2 k
a22 k
a32 k
a42 k
a52 k


al3 k
a23 k
a33 k
a43 k
a53 k


al4 k
a24 k
a34 k
a44 k
a54 k


al5 k
a25 k
a35 k
a45 k
a55 k


al6k ʌ

a26 k

a36 k

a46 k

a56 k


dwt-k
dpt-k
Vl
Vt-k
Vc
Vt-k
rt-k


elt ʌ
e21


ukbpt-k


e^

e3t

e41

e51 /


P
ukbpt =c6 + a6lk
k
=l


a62k


a63k


a64k


a65k


a66k


dwt-k
dpt-k
Vl
Vt-k


Vc

Vt-k
rt-k
ukbpt-k


+ e6t


(15)


Now we examine if ukbpt can be taken as ”exogenous” variable. The partial system (14) is
exactly identified. Hence the variables
ut are weakly exogenous for the parameters in the
partial system,
7 For the strong exogeneity of ukbpt, we test whether dwt,dpt,Vtl,Vtc,rt
Granger cause ukbpt .

The test is carried out by testing the hypothesis: H0 : aijk =0, (i =6;j =1, 2, 3, 4, 5; k =
1
, 2, ..., 12) in (15) based on likelihood ratio

Chi-Squared(60)= 69.157150 with Significance Level 0.19572294

7For detailed discussion see Chen (2003)

19



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