' MODEL LP3 for Eviews version 4.1 ' from Wynne Godley & Marc Lavoie ' MONETARY ECONOMICS ' Chapter 5 ' This program creates model LP3, described in section 5.9, and simulates the model ' to produce results in figures 5.10 - 5.12 ' **************************************************************************** ' Copyright (c) 2006 Gennaro Zezza ' Permission is hereby granted, free of charge, to any person obtaining a ' copy of this software and associated documentation files (the "Software"), ' to deal in the Software without restriction, including without limitation ' the rights to use, copy, modify, merge, publish, distribute, sublicense, ' and/or sell copies of the Software, and to permit persons to whom the ' Software is furnished to do so, subject to the following conditions: ' ' The above copyright notice and this permission notice shall be included in ' all copies or substantial portions of the Software. ' ' THE SOFTWARE IS PROVIDED "AS IS", WITHOUT WARRANTY OF ANY KIND, EXPRESS OR ' IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY, ' FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. IN NO EVENT SHALL THE ' AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY CLAIM, DAMAGES OR OTHER ' LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT OR OTHERWISE, ARISING ' FROM, OUT OF OR IN CONNECTION WITH THE SOFTWARE OR THE USE OR OTHER DEALINGS ' IN THE SOFTWARE. ' **************************************************************************** ' Create a workfile, naming it LP3, to hold annual data from 1945 to 2010 create lp3 a 1945 2010 ' Creates and documents series series add add.displayname Random shock to expectations series add2 add.displayname Addition to the governemnt expenditure setting rule series b_cb b_cb.displayname Government bills held by Central Bank series b_d b_d.displayname Demand for government bills series b_h b_h.displayname Government bills held by households series b_s b_s.displayname Government bills supplied by government series bl_d bl_d.displayname Demand for government bonds series bl_h bl_h.displayname Government bonds held by households series bl_s bl_s.displayname Supply for government bonds series cg cg.displayname Capital gains on bonds series cg_e cg_e.displayname Expected capital gains on bonds series cons cons.displayname Consumption goods series er_rbl er_rbl.displayname Expected rate of return on bonds series g g.displayname Government goods series h_d h_d.displayname Demand for cash series h_h h_h.displayname Cash money held by households series h_s h_s.displayname Cash money supplied by central bank series p_bl p_bl.displayname Price of bonds series p_bl_e p_bl_e.displayname Expected price of bonds series p_bl_bar p_bl_bar.displayname Exogenously set price of bonds series psbr psbr.displayname Public sector borrowing requirement (PSBR) series r_b r_b.displayname Interest rate on government bills series r_bar r_bar.displayname Exogenously set interest rate on government bills series r_bl r_bl.displayname Interest rate on government bonds series t t.displayname Taxes series tp tp.displayname Target proportion in households portfolio series v v.displayname Households wealth series v_e v_e.displayname Expected households wealth series y y.displayname Income = GDP series yd_r yd_r.displayname Regular disposable income of households series yd_r_e yd_r_e.displayname Expected regular disposable income of households ' Generate parameters series alpha1 alpha1.displayname Propensity to consume out of income series alpha2 alpha2.displayname Propensity to consume out of wealth series beta beta.displayname Adjustment parameter in price of bills series betae betae.displayname Adjustment parameter in expectations series bot bot.displayname Bottom value for TP series chi chi.displayname Weight of conviction in expected bond price series lambda10 lambda10.displayname Parameter in asset demand function series lambda12 lambda12.displayname Parameter in asset demand function series lambda13 lambda13.displayname Parameter in asset demand function series lambda14 lambda14.displayname Parameter in asset demand function series lambda20 lambda20.displayname Parameter in asset demand function series lambda22 lambda22.displayname Parameter in asset demand function series lambda23 lambda23.displayname Parameter in asset demand function series lambda24 lambda24.displayname Parameter in asset demand function series lambda30 lambda30.displayname Parameter in asset demand function series lambda32 lambda32.displayname Parameter in asset demand function series lambda33 lambda33.displayname Parameter in asset demand function series lambda34 lambda34.displayname Parameter in asset demand function series theta theta.displayname Tax rate series top top.displayname Top value for TP series z1 z1.displayname Switch parameter series z2 z2.displayname Switch parameter series z3 z3.displayname Switch parameter series z4 z4.displayname Switch parameter ' Set sample size to all workfile range smpl @all ' Assign values for ' PARAMETERS alpha1=0.8 alpha2=0.2 beta=0.01 betae=0.5 chi=0.1 lambda20 = 0.44196 lambda22 = 1.1 lambda23 = 1 lambda24 = 0.03 lambda30 = 0.3997 lambda32 = 1 lambda33 = 1.1 lambda34 = 0.03 theta=0.1938 bot=0.495 top=0.505 z1=0 z2=0 z3=0 z4=0 ' EXOGENOUS g=20 r_bar = 0.03 p_bl_bar = 20 ' Opening values for stocks v = 95.803 b_h = 37.839 b_s = 57.964 b_cb = b_s - b_h bl_h = 1.892 bl_s = bl_h h_s = 20.125 ' Opening values for lagged endogenous yd_r = 95.803 r_b = r_bar p_bl = p_bl_bar p_bl_e = p_bl tp=bl_h*p_bl/(bl_h*p_bl+b_h) z1=0+1*(tp>top) z2=0+1*(tp top) ' Second switch - eq.5.26 lp3_mod.append z2 = 0 + 1*(tp < bot) ' Target proportion of bills - eq.5.27 lp3_mod.append tp = (bl_h(-1)*p_bl(-1))/(bl_h(-1)*p_bl(-1) + b_h(-1)) ' Public Sector Borrowing Requirement - PSBR - eq.5.28 lp3_mod.append psbr = (g + r_b*b_s(-1) + bl_s(-1)) - (t + r_b*b_cb(-1)) ' Third switch - eq.5.29 lp3_mod.append z3=0+1*(psbr(-1)/y(-1) > 0.03) ' Fourth switch - eq.5.30 lp3_mod.append z4=0+1*(psbr(-1)/y(-1) < -0.03) ' Government expenditure - eq.5.31 lp3_mod.append g = g(-1) - (z3 + z4)*psbr(-1) + add2 ' End of model ' Select the baseline scenario lp3_mod.scenario baseline ' Drop first observation to get starting values for solving the model smpl 1946 @last ' Solve the model for the current sample lp3_mod.solve ' Creates charts from simulated variables ' Creates the chart in Figure 5.11 smpl 1950 2000 graph fig5_11.line y_0 fig5_11.options linepat fig5_11.setelem(1) lcolor(red) lwidth(2) lpat(1) fig5_11.name(1) Gross domestic product fig5_11.addtext(t) Figure 5.11 Evolution of national income (GDP) following a sharp decrease in the propensity to consume out of income show fig5_11 ' Creates the chart in Figure 5.12 smpl 1950 2000 graph fig5_12.line g_0 psbr_0/y_0 fig5_12.options linepat fig5_12.setelem(1) lcolor(red) lwidth(2) lpat(1) fig5_12.setelem(2) lcolor(blue) lwidth(2) lpat(2) fig5_12.setelem(2) axis(right) fig5_12.addtext(t) Figure 5.12 Evolution of G and PSBR/GDP following a sharp decrease in the propensity to consume out of income fig5_12.legend -display fig5_12.addtext(0.6, 0.1, textcolor(red)) "Pure government expenditure (LHS)" fig5_12.addtext(1.5, 1.4, textcolor(blue)) "Deficit to national income ratio (RHS)" fig5_12.scale(left) linear range(16.25, 20.5) overlap fig5_12.scale(right) linear range(-0.005, 0.05) overlap show fig5_12