Christopher W. Murphy

Labour Force Participation

The supply of labour is reckoned as the number of persons currently in a job or actively seeking one. This total — ‘the labour force’ — may be factored into the number of potential workers (those of working age) and the labour force participation ratio. The latter is characterized in MM by the ratio of the actual labour force to its underlying potential size.

Business Fixed Investment

The investment equation for fixed business capital in MM is driven by prospective profitability and by lagged demand conditions in the market for the domestic commodity, thus incorporating both neoclassical influences and an accelerator effect. Prospective profitability is measured by Tobin’s (average) q, which is the ratio of the market price of a second-hand unit of capital to the price of a newly constructed one. Hence there are strong parallels between this chapter and Chapter 9. The presence of the medium-run equilibrium price of the domestic good p Y MR in the investment equation, however, requires the theory of the enterprise pryoduction block laid out in Chapter 10.

The Government Sector

Governments impinge on the economy in at least four ways: (i) General government They provide goods and services (e.g., schooling, police services and defence) in areas in which private enterprises would not do so, or would do so in a way judged socially sub-optimal by the polity. (ii) Transfer payments They transfer command over goods and services from certain groups to others (e.g., from the employed to the unemployed). (iii) Public enterprises They run certain trading enterprises which (at least in theory) could be run with the same or higher social efficiency by private enterprise. (iv) Macroeconomic management They attempt to modify the evolution of the economy so as to avoid the more extreme troughs and peaks in economic activity. The first of these relates to such mundane activities as municipal garbage collection and provision of State highways. In MM it is not modeled; the real amounts expended are treated as exogenous.

MM2 — A Fully Integrated Macro-CGE Model

This chapter introduces Murphy Model 2 (MM2), which is the recent successor to MM. MM2 is a fully integrated macro-CGE1 model of Australia. While MM had only a macro dimension, MM2 has an industry dimension as well.

Distinguishing Features of MM

MM is a 100-equation, quarterly, macroeconometric model of the Australian economy designed for policy analysis and forecasting. This chapter highlights the model’s distinctive features as background for the remainder of this book.

Domestic Good Inventory Investment

With MM’s treatment of traded goods now fully described, we return to the scheme laid out in the first section of Chapter 17, and apply it to the domestic good. The formulation for the desired stock of inventories is described in section 19.2, and the dynamics of adjustment to this level in section 19.3. Estimated coefficients are reported in section 19.4. Notation for variables is set out in Table 19.1.1, and for coefficients in the results table, Table 19.4.1. Finally, the steady state is discussed in section 19.5.

Principal Mechanisms in MM

This chapter reviews important paradigms that heavily influence the architecture of MM. We commence with some well known contributions to the pure theory of macroeconomics; in particular, we focus on the work of Mundell and Fleming and on Dornbusch’s model of overshooting exchange rates. Some brief attention is paid also to the open-economy macro models that were developed during the 1980s; a characteristic of the latter is the incorporation of a binding intertemporal budget constraint on the actions of governments.

Sales of the Domestic Good; Miscellaneous Identities for Investment and Capital

This chapter lists four identities. The first defines aggregate sales of the domestic good in terms of its components; namely, private and public consumption and investment spending, and maintenance of the housing stock. Later in section 21.2 it is demonstrated that together with e behavioural equation for stock-building and an accounting identity from Chapter 19, the identity defining sales of the domestic good implies that output of the domestic good in MM is demand determined.

Price Dynamics for the Domestic Good

This chapter is structured as follows: in this section, the form chosen for the domestic good’s price dynamics is set out, together with a short discussion of the equation’s steady state. Then in section 20.2, notation is tabulated, estimated coefficients are reported, and the dynamics of the price of the domestic good is illustrated pictorially for the cases of a temporary fiscal contraction and a temporary rise in the overseas price of ‘commodity’ exports.

National-Accounting, Stock-Flow and Miscellaneous Identities

This chapter is a compendium of those MM equations which have not been covered above in Chapters 5 through 23. All of the remaining equations are identities, and many of them deal with stock-flow accounting. However we start, in section 24.2, with the identities for gross national expenditure and for gross domestic product. Stock-flow identities are listed in section 24.3, and lead-lag identities in section 24.4. Finally, three definitional identities used in the implementation of MM — which were encountered in the exposition above, but not formally listed there as equations of the model — are set out in section 24.5.