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

(5) is a much more parsimonious presentation of the DGP than VAR(12), and henceforth
a much more efficient model to describe the economic dynamics for this period.

Omitting the insignificant parameters in the structural models and putting the NAIRU
state variables and the like into the constant terms we then get following estimation
result:

dwt  =  0.16V_t^l_-1 + 0.29dpt-1 + 0.71dp12t-1 - 0.08ukbpt - 0.15 +e1t      (21)

dpt  =  0.04V_t^c_-1 + 0.08dwt + 0.92dp12t-1 + 0.01d74t - 0.03 +e2t         (22)

VYtl  =  0.42V_t^c_- 1 - 0. 10ukbpt - 0.003d74t + 0.02 + e3t                      (23)

Vc  =  -0.08Vc—₁ - 0.08(rt - dpt) + 0.97V^l - 0.38ukbpt + 0.08 + e4t     (24)

Гt  =  -0.06rt—1 + 0.44dpt—1 + 0.08V_t^c_-1 - 0.06 + e5t                      (25)

Alternatively we also estimate a slightly modified version of (26) - (30) where we look
at the time rate of change of labor utilization and capacity utilization instead of their
growth rate.

dw_t = βw 1 (V^l - V^l)t-1 + κwdpt—1 + (1 - κw)dp 12t—1 + e 11           (26)

dpt = βp 1 (V^c - V^c)t—1 + Kpdwt + (1 - Kp)dp 12t—1 - s ■ Kpdynt— 1        (27)

V^c = -αvc(V^c - V^c) ± .(ω - ω) - α((r - p) - (Го - π))         (28)

V^l = β_vι(V^c - V^c) - βv,(ω - ωo)+ β_v3V^c                 (29)

r = -Yr (r - Го) + Yp(p - ∏) + Yvc (V^c - }Y^c) + Yω (ω - ωo)           (30)

Omitting the insignificant parameters in the structural models (26) - (30) and putting
all constants of the theoretical model into a single constant term, we get following
estimation result:

dwt  =  0.16V_t^l_—1 + 0.26dpt—1 + 0.74dp12t—1 - 0.07ukbpt - 0.15 +e1t     (31)

dpt  =  0.04V_t^c_—1 + 0.08dwt + 0.92dp12t—1 + 0.01d74t - 0.03 +e2t         (32)

V^'_t^l  =  0.04V^'_t^c_—1 - 0.10ukbpt - 0.004d74t +e3t                             (33)

V^'_t^c  =  -0.12V_t^c_—1 - 0.12(rt - dpt) - 0.57ukbpt +0.1+e4t               (34)

^t  =  -0.08rt—1 + 0.55dpt—1 + 0.06V_t^c— ₁ - 0.05 + e51                      (35)

Obviously these alternative specifications give similar result as in the formulation of
restricted VAR(12) we considered beforehand.

21

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