Lawrence R. Klein

Some Econometrics of Growth: Great Ratios of Economics

Introduction, 173. — Statistical estimation of the model, 174. — The savings-income ratio, 175. — The capital-output ratio, 178. — Labors share, 180. — Velocity of circulation, 184. — The capital-labor ratio, 186. — The model as a whole, 188. — Some remarks on the rate of interest, 192. — The aggregate production function and factor substitution, 195. — Another possible great ratio, 197.

The Use of Econometric Models as a Guide to Economic Policy

IT IS desirable to provide tools of analysis suited for public economic policy that are, as much as possible, independent of the personal judgments of a particular investigator. Econometric models are put forth in this scientific spirit, because these models, if fully developed and properly used, eventually should lead all investigators to the same conclusions, independent of their personal whims. The usual experience in the field of economic policy is that there are about as many types of advice as there are advisors (sometimes even more!). Statistical models of the working of the economy are not proposed as magic formulas which divulge all the secrets of the complex real world in a single equation. The statistical models attempt to provide as much information about future or other unknown phenomena as can be gleaned from the historical records of observable and measurable facts. To the extent to which people maintain their past behavior patterns in the future, the statistical models provide information about the quantitative properties of economic variables in the future. However, econometricians do not operate in a vacuum; their methods are not purely mechanical in the sense that they do nothing but substitute in formulas. Any information of a qualitative nature that is available should be used by the econometrician in drawing inferences about the real world from his models. For example, suppose that an econometrician is called upon to forecast next years level of employment and suppose further that this econometrician knows that war will break out next year. Would the econometrician merely substitute into his equations of peacetime behavior patterns in order to forecast employment in a period during which there will be war? Obviously, any qualitative information (e.g., the outbreak of war next year) must be taken into account in order to make a proper forecast. The nonstatistical economist has only qualitative information from which to make judgments. The statistical economist has this same qualitative information plus a thorough knowledge of historically developed behavior patterns; hence it may be said that the latter is better equipped.

Econometric model-building at regional level

Abstract The increasing importance of macroeconometric models in regional economic analysis is discussed. Conceptual and estimation problems are outlined and a prototype regional model is summarized. After a short history of such models, the specification of typical models and their testing is presented and the structure of an estimated model for Philadelphia is given. Applications of regional econometric models to forecasting, impact analysis and policy study are presented. The prospects for regional model building are contained in the final part of the paper.

Capacity Utilization: Concept, Measurement, and Recent Estimates

ON SEVERAL OCCASIONS in the past fifteen years, my colleagues and I have tried to explain disparities among alternative measures of capacity utilization and to justify our own approach to the measurement problem.1 George Perry, in his contribution to this issue of Brookings Papers, has indicated many of the important issues, and I would like to amplify his points or restate them from another viewpoint in the interests of clarification. Briefly, the Federal Reserve index estimates that as of mid-October 1973, a fair amount of spare capacity existed in the American economy. The estimated operating rate was only 83.4 percent for 1973:3. By contrast, the Wharton index for manufacturing was as high as 96.7 in the same period, and was rising faster than the Federal Reserve index. The McGraw-Hill index was at an intermediate level of 86.5 percent in September. Similar divergences among the indexes had been apparent for several months. These messages are so different that they suggest the need for a close look into the whole subject. For some years the Wharton and Federal Reserve indexes of utilization followed similar paths. They began to diverge in 1965, when the Wharton index rose sharply, as if signaling the onset of the

Theories of Effective Demand and Employment

,HERE iS much talk about such matters as the downward rigidity of , wage rates, the relationship of wages to employment and output, the influence of liquid assets on the level of economic activity, and the stage of maturity of the American economy. The various theories of employment must be examined in the light of these concepts in order to get some clear answers to important economic problems. The Keynesian theories are often accused of being based on assumptions of rigid wage rates or interest-elastic liquidity preferences, but there may be much less truth in these assertions than is commonly thought to be the case. The purpose of this paper will be to study three theories of employment-(i) the classical, (2) the Keynesian, and (3) the Marxian-in order to attempt to clear up some confusions that still exist. One of the main objectives will be to try to show the distinctions between necessary and sufficient assumptions that underlie each theory.

Can export-led growth continue indefinitely? An Asia-Pacific perspective

In this paper first I outline some of the most important features of Japanese and “new Japanese” development. In scholarly conferences over these many years, there are different perspectives suggested by experts. Some stress dualism, clever currency management, monetary policy, wage flexibility, and even Confucianism. I am not going to quarrel with these various interpretations of successful development, but I focus on specific aspects that have caught my attention over the past 30 years of watching and studying the Japanese and other Asian economies: (1) quantity manufacturing, (2) quality manufacturing, and (3) Export-led growth in quality manufacturing. Japan and other Asian countries that have achieved economic success did not do so through a concentration on large-scale production of basic materials and exporting the surplus to industrial nations round the world. Japan could not, in fact, have found the basic materials to produce and export. Japan is a large-scale importer of fuels, cotton, wool, grains, and many other basic commodities for its industrial machine. Taiwan relied on land reform, food production, exportation of sugar, pineapple, and other primary commodities, but did not achieve its phenomenal success until they shifted to large quantity manufacturing. My line of argument does not draw only upon Asia-Pacific experience. Brazil used to rely heavily on exports of coffee and other basic materials for economic

Protectionism: An analysis from project LINK

Abstract The LINK system of world trade is used to examine present tendencies toward protectionism. In protectionist scenarios we increase the prices of manufactured imports into 13 LINK-OECD countries by 5, 10, and 20 percent respectively, for 1978–1979. If a countrys import equations do not depend significantly on relative price, we impose corresponding quantitative import restrictions of 5, 10, and 20 percent. Smaller OECD countries, developing countries, and socialist countries are assumed to be nonprotectionist in these scenarios. The discrepancies between the values of leading variables in the protectionist scenarios and in a baseline case show the effects of the different degrees of protectionism assumed. The results describe and validate Adam Smiths principles of the gains from free trade.

Components of Competitiveness

There are various ways of looking at economic competitiveness. Some of the popular conceptions of Americas relative position are clarified by examining the concept in terms of wage cost, productivity, profit margins, and exchange rates. A quantitative approach is laid out and examined in relation to similar measures for other countries. Also some relationships between competitiveness and the external deficit on current account for the United States are analyzed.

Economics in Theory and Practice: An Eclectic Approach

Lawrence Klein, University of Pennsylvania Jaime Marquez, Federal Reserve BoarrI* All examination of the economics literature over the last twenty years reveals a marked tendency towards polarisation. On the one hand, there has been a propensity to develop theoretical models which have little connection with either empirical verification or problems requiring immediate attention. On the other iland, empirical analyses are generally typified by testing for its own sake, with limited examination of the implications of the results. As a result, the number of papers confronting theory with facts towards the solution of economic problems has been on the decline for years. To fill this growing gap in the literature, we have invited a number of authors to write papers using both theoretical and empirical techniques to address current issues of interest to the profession at large: the US trade deficit and the global implications of policies that attempt to reduce it, the international ramifications of the debt crisis, the international oil market and its implications for the US oil industry, and the development of new econometric techniques. In addressing these issues, each author has approached the subject matter from an eclectic standpoint - that is, avoiding strict adherence to a given doctrine.

Some Potential Linkages for Input-Output Analysis with Flow-of-Funds

Three major, interrelated accounting statements, at the frontiers of quantitative economic analysis, are three interrelated systems, namely: (1) National income and product accounts (NIPA), (2) The input-output tableaux, (IO), and (3) flow-of- funds accounts (FF). The third-mentioned system is somewhat less available and used in only limited areas of macroeconomic analysis. This paper is mainly concerned with use of FF accounting systems. This system shows where financial resources originate, and where they go in support of real capital formation. In this respect, interest rates and other market-based financial rates are of key importance. While much macroeconomic analysis is based on the rates that fit the yield curve, showing the interest rate structure over various maturities of debt associated with a given degree of risk. In contrast, the FF accounts throw light on the whole spectrum of interest rates, across maturities and debt qualities. For example, in analysis of the real estate market and funding of capital formation there, it is important to have a full understanding of the course of mortgage rates of different maturities and qualities. In short, it is necessary to develop a full appreciation of supply and demand forces in the mortgage market, which often is not obviously related to movements of the operative rate for monetary policy, such as very short-term inter bank rates or call money rates. This paper attempts to provide material from the flow-of-funds accounts that would make it possible to analyze the movement of relevant mortgage rates or whatever other rates are needed to understand the financing of capital formation in real estate.