' MODEL OPEN for Eviews version 6 ' from Wynne Godley & Marc Lavoie ' MONETARY ECONOMICS ' Chapter 6 ' This program creates model OPENM, described in chapter 6, and simulates the model ' to produce results in par. 6.9.3 ' **************************************************************************** ' 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 OPENM, to hold annual data from 1945 to 2010 wfcreate(wf=openm, page=annual) a 1945 2010 ' Creates and documents series series b_cb_n b_cb_n.displayname Bills held by the Central bank in Country N series b_cb_s b_cb_s.displayname Bills held by the Central bank in Country S series b_h_n b_h_n.displayname Bills held by households, Country N series b_h_s b_h_s.displayname Bills held by households, Country S series b_s_n b_s_n.displayname Supply of government bills in Country N series b_s_s b_s_s.displayname Supply of government bills in Country S series cons_n cons_n.displayname Households consumption, Country N series cons_s cons_s.displayname Households consumption, Country S series g_n g_n.displayname Government expenditure, Country N series g_s g_s.displayname Government expenditure, Country S series h_h_n h_h_n.displayname Cash held by households, Country N series h_h_s h_h_s.displayname Cash held by households, Country S series h_s_n h_s_n.displayname Supply of cash in Country N series h_s_s h_s_s.displayname Supply of cash in Country S series im_n im_n.displayname Imports, Country N series im_s im_s.displayname Imports, Country S series or_n or_n.displayname Gold holding by Central bank in Country N series or_s or_s.displayname Gold holding by Central bank in Country S series p_g_bar p_g_bar.displayname Price of gold, set exogenously series p_g_n p_g_n.displayname Price of gold in Country N series p_g_s p_g_s.displayname Price of gold in Country S series r_n r_n.displayname Interest rate on bills in Country N series r_s r_s.displayname Interest rate on bills in Country S series t_n t_n.displayname Tax payments, Country N series t_s t_s.displayname Tax payments, Country S series v_n v_n.displayname Households wealth, Country N series v_s v_s.displayname Households wealth, Country S series x_n x_n.displayname Exports, Country N series x_s x_s.displayname Exports, Country S series xr xr.displayname Exchange rate (units of currency S for one unit of currency N) series xr_bar xr_bar.displayname Exchange rate, set exogenously series y_n y_n.displayname National income, Country N series y_s y_s.displayname National income, Country S series yd_n yd_n.displayname National disposable income, Country N series yd_s yd_s.displayname National disposable income, Country S ' Generate parameters series alpha1_n alpha1_n.displayname Propensity to consume out of income in Country N series alpha1_s alpha1_s.displayname Propensity to consume out of income in Country S series alpha2_n alpha2_n.displayname Propensity to consume out of wealth in Country N series alpha2_s alpha2_s.displayname Propensity to consume out of wealth in Country S series lambda0_n lambda0_n.displayname Parameter in asset demand function, Country N series lambda0_s lambda0_s.displayname Parameter in asset demand function, Country S series lambda1_n lambda1_n.displayname Parameter in asset demand function, Country N series lambda1_s lambda1_s.displayname Parameter in asset demand function, Country S series lambda2_n lambda2_n.displayname Parameter in asset demand function, Country N series lambda2_s lambda2_s.displayname Parameter in asset demand function, Country S series mu_n mu_n.displayname Import propensity, Country N series mu_s mu_s.displayname Import propensity, Country S series phi_n phi_n.displayname Parameter in monetary policy reaction function, Country N series phi_s phi_s.displayname Parameter in monetary policy reaction function, Country S series theta_n theta_n.displayname Tax rate in Country N series theta_s theta_s.displayname Tax rate in Country S ' Set sample size to all workfile range smpl @all ' Assign values for ' PARAMETERS alpha1_n = 0.6 alpha1_s = 0.7 alpha2_n = 0.4 alpha2_s = 0.3 lambda0_n = 0.635 lambda0_s = 0.67 lambda1_n = 5 lambda1_s = 6 lambda2_n = 0.01 lambda2_s = 0.07 mu_n = 0.18781 mu_s = 0.18781 phi_n = 0.02 phi_s = 0.06 theta_n = 0.2 theta_s = 0.2 ' EXOGENOUS g_n = 20 g_s = 20 p_g_bar = 1 p_g_n = p_g_bar r_n = 0.025 r_s = 0.025 xr_bar = 1 p_g_s = p_g_n*xr_bar ' Starting values for stocks b_cb_n = 11.622 b_cb_s = 11.622 b_h_n = 64.865 b_h_s = 64.865 b_s_n = 76.486 b_s_s = 76.486 or_n = 10 or_s = 10 v_n = 86.487 v_s = 86.487 h_h_n = v_n - b_h_n h_h_s = v_s - b_h_s h_s_n = h_h_n h_s_s = h_h_s ' Create a model object, and name it openm_mod model openm_mod ' Add equations to model OPENM ' Determination of national income in Country N - eq. 6.O.1 openm_mod.append y_n = cons_n + g_n + x_n - im_n ' Determination of national income in Country S - eq. 6.O.2 openm_mod.append y_s = cons_s + g_s + x_s - im_s ' Imports in Country N - eq. 6.O.3 openm_mod.append im_n = mu_n*y_n ' Imports in Country S - eq. 6.O.4 openm_mod.append im_s = mu_s*y_s ' Exports of Country N - eq. 6.O.5 openm_mod.append x_n = im_s/xr ' Exports of Country S - eq. 6.O.6 openm_mod.append x_s = im_n*xr ' Disposable income in Country N - eq. 6.O.7 openm_mod.append yd_n = y_n - t_n + r_n(-1)*b_h_n(-1) ' Disposable income in Country S - eq. 6.O.8 openm_mod.append yd_s = y_s - t_s + r_s(-1)*b_h_s(-1) ' Tax payments in Country N - eq. 6.O.9 openm_mod.append t_n = theta_n*(y_n + r_n(-1)*b_h_n(-1)) ' Tax payments in Country S - eq. 6.O.10 openm_mod.append t_s = theta_s*(y_s + r_s(-1)*b_h_s(-1)) ' Wealth accumulation in Country N - eq. 6.O.11 openm_mod.append v_n = v_n(-1) + (yd_n - cons_n) ' Wealth accumulation in Country S - eq. 6.O.12 openm_mod.append v_s = v_s(-1) + (yd_s - cons_s) ' Consumption function in Country N - eq. 6.O.13 openm_mod.append cons_n = alpha1_n*yd_n + alpha2_n*v_n(-1) ' Consumption function in Country S - eq. 6.O.14 openm_mod.append cons_s = alpha1_s*yd_s + alpha2_s*v_s(-1) ' Cash money held in Country N - eq. 6.O.15 openm_mod.append h_h_n = v_n - b_h_n ' Cash money held in Country S - eq. 6.O.16 openm_mod.append h_h_s = v_s - b_h_s ' Demand for government bills in Country N - eq. 6.O.17 openm_mod.append b_h_n = v_n*(lambda0_n + lambda1_n*r_n - lambda2_n*(yd_n/v_n)) ' Demand for government bills in Country S - eq. 6.O.18 openm_mod.append b_h_s = v_s*(lambda0_s + lambda1_s*r_s - lambda2_s*(yd_s/v_s)) ' Supply of government bills in Country N - eq. 6.O.19 openm_mod.append b_s_n = b_s_n(-1) + (g_n + r_n(-1)*b_s_n(-1)) - (t_n + r_n(-1)*b_cb_n(-1)) ' Supply of government bills in Country S - eq. 6.O.20 openm_mod.append b_s_s = b_s_s(-1) + (g_s + r_s(-1)*b_s_s(-1)) - (t_s + r_s(-1)*b_cb_s(-1)) ' Bills held by Central bank in Country N - eq. 6.O.21 openm_mod.append b_cb_n = b_s_n - b_h_n ' Bills held by Central bank in Country S - eq. 6.O.22 openm_mod.append b_cb_s = b_s_s - b_h_s ' Gold holding by Central bank in Country N - eq. 6.O.23 openm_mod.append or_n = or_n(-1) + (h_s_n - h_s_n(-1) -(b_cb_n - b_cb_n(-1)))/p_g_n ' Gold holding by Central bank in Country S - eq. 6.O.24 openm_mod.append or_s = or_s(-1) + (h_s_s - h_s_s(-1) -(b_cb_s - b_cb_s(-1)))/p_g_s ' Supply of cash in Country N - eq. 6.O.25 openm_mod.append h_s_n = h_h_n ' Supply of cash in Country S - eq. 6.O.26 openm_mod.append h_s_s = h_h_s ' Price of gold in Country N - eq. 6.O.27 openm_mod.append p_g_n = p_g_bar ' Price of gold in Country S - eq. 6.O.28 openm_mod.append p_g_s = p_g_n*xr ' Exchange rate - eq. 6.O.29 openm_mod.append xr = xr_bar ' Interest rate in Country N - eq. 6.O.30A openm_mod.append r_n = r_n(-1) - phi_n*(d(or_n(-1))*p_g_n(-1))/or_n(-1) ' Interest rate in Country S - eq. 6.O.31A openm_mod.append r_s = r_s(-1) - phi_s*(d(or_s(-1))*p_g_s(-1))/or_s(-1) ' End of model ' Select the baseline scenario openm_mod.scenario baseline ' Drop first observation to get starting values for solving the model smpl 1946 @last ' First experiment: increase in the propensity to import of Country S smpl 1960 @last mu_s = 0.20781 smpl @all ' Since the model is now explosive, we limit the solution to 10 periods after the shock smpl 1946 1970 openm_mod.solve(i=p) ' Creates charts from simulated variables smpl 1958 1964 ' Creates the chart in Figure 6.14 graph fig6_14.line r_n_0 r_s_0 fig6_14.options linepat fig6_14.setelem(1) lcolor(blue) lwidth(2) lpat(1) fig6_14.setelem(2) lcolor(red) lwidth(2) lpat(2) fig6_14.name(1) North interest rate fig6_14.name(2) South interest rate fig6_14.addtext(t,just(c)) Figure 6.14 Evolution of interest rates following an increase in the import propensity of the S Country show fig6_14 ' Creates the chart in Figure 6.15 graph fig6_15.line x_n_0-im_n_0 t_n_0-(g_n+r_n_0*b_s_n_0(-1)) x_s_0-im_s_0 t_s_0-(g_s+r_s_0*b_s_s_0(-1)) fig6_15.options linepat fig6_15.setelem(1) lcolor(black) lwidth(2) lpat(1) fig6_15.setelem(2) lcolor(red) lwidth(2) lpat(2) fig6_15.setelem(3) lcolor(green) lwidth(2) lpat(3) fig6_15.setelem(4) lcolor(blue) lwidth(2) lpat(4) fig6_15.name(1) North trade balance fig6_15.name(2) North government balance fig6_15.name(3) South trade balance fig6_15.name(4) South government balance fig6_15.addtext(t,just(c)) Figure 6.15: Evolution of trade accounts and government balances \nfollowing an increase in import propensity in the South show fig6_15