Research Discussion Paper – RDP 7705 Modelling Monetary Disequilibrium


This paper represents somewhat of a shift of emphasis, from model building to hypothesis testing, in the RBA76 model project. It presents a late-1977 version of the model, and compares its properties with those of four other models. The most interesting results are perhaps (i) the different response to a fairly standard government spending impulse of models with and without the channels for the influence of monetary disequilibrium, and (ii) the relatively poor performance of models in which the quantity of money is determined in a conventional manner as adjusting directly to the demand for money, rather than indirectly as in the RBA76 model.

The late-1977 version of the model is similar to the mid-1977 version presented in Research Discussion Papers 7702 and 7703. The major change is the inclusion of a direct channel of influence for flow disequilibrium in the money market on the capital account of the balance of payments, although in several minor respects the theoretical structure of the model has been tightened up. A comparison of the relevant simulation paths in this model and in Research Discussion Paper 7703 illustrates the effect of the changes to the model, and of the consequent changes to some key parameters. The comparison should serve to illustrate the current uncertainty concerning the modelling of the dynamic response of the economy, and the need for further research.

The authors are grateful to several colleagues for helpful comments on an earlier draft, and especially to Bob Rankin and Eric Kiernan. Neither of these nor our employer is necessarily in agreement with the analysis or conclusions of the paper.