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Comparative Properties of Models of the UK Economy

Published online by Cambridge University Press:  26 March 2020

P.G. Fisher ,
D.S. Turner ,
K.F. Wallis  and
J.D. Whitley
P.G. Fisher
Affiliation:
ESRC Macroeconomic Modelling Bureau at the University of Warwick
D.S. Turner
Affiliation:
ESRC Macroeconomic Modelling Bureau at the University of Warwick
K.F. Wallis
Affiliation:
ESRC Macroeconomic Modelling Bureau at the University of Warwick
J.D. Whitley
Affiliation:
ESRC Macroeconomic Modelling Bureau at the University of Warwick
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Extract

The nature of the association between inflation and the level of unemployment has been a persistent issue of controversy over the last three decades. Initially, attention focussed on the statistical relationship between nominal wage inflation and unemployment— the Phillips curve—which could be seen equally as a relationship between price inflation and unemployment, if prices are a constant mark-up on wages. This was quickly adopted as a menu for policy choice, describing the trade-off between increases in unemployment and reductions in inflation. By the 1970s, however, the question was whether a long-run trade-off existed at all, the OECD economies having experienced rising unemployment and, simultaneously, rising inflation. The subsequent re-examination of labour market behaviour introduced the concept of an equilibrium rate (the natural rate) of unemployment which, in the monetarist view, was not amenable to demand management policies. More recent developments reflect a growing concern with the supply side of the economy, including the question of what determines the non accelerating inflation rate of unemployment (NAIRU).

Type
Articles
Information
National Institute Economic Review , Volume 133 , August 1990 , pp. 91 - 115
Copyright
Copyright © 1990 National Institute of Economic and Social Research

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Footnotes

This paper describes the current versions of six major macroeconometric models, using their wage-price-exchange rate interaction as a core supply-side framework in which to interpret their properties, as revealed in standard simulation experiments. Analysis of the individual relationships reveals several deviations from this framework in the majority of the models, precluding a straightforward derivation of their long-run properties. Despite differences in their supply-side treatment the models are essential to a description of the inflationary processes in the economy and, more generally, through ready-reckoners, to the provision of a quantitative assessment of policy options.

A PC-program which presents many of the results described in this paper in convenient ready-reckoner form is available from the Bureau to academic institutions at a small charge. Editorial responsibility is taken by the authors, not by the Editorial Board of the Review.

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