RDP 1977-07: Money and the Balance of Payments Appendix A: The Specification of the Core Models

The Equations of the U.K. Economy Model[1]

(1) Real expenditure, demand for money

(2) Real exports of goods and services

(3) Real imports of goods and services

(4) Real output

(5) Price of output

(6) Price of exports

(7) Bank rate

(8) Tax receipts

(9) Domestic credit

(10) Net capital flows

(11) International reserves

(12) Stock of money

The last three equations are discussed in the text.

The Equations of the RBA76 Model of the Australian Economy

1. Real expenditure

1a. household expenditure, demand for money, exchange rate expectations
1b. net business fixed investment

2. Exports of goods and services

3. Imports of goods and services

4. Output of goods

5. Domestic prices

5a. price of output
5b. price of government current goods and services

6. Price of exports

7. Bond rate

8. Taxes

8a. direct taxes
8b. indirect taxes

9. Credit market

9a. domestic credit expansion
9b. non-bank demand for government securities
9c. bank advances
9d. interest payments on government debt

10. Net capital inflow

11. Foreign reserves

12. Volume of money

These equations are discussed in the text.

13. Exchange rate

14. Labour market

14a. changes in labour demand, desired inventories

14b. labour supply
14c. average weekly earnings

15. Change in inventories

16. Business fixed capital stock

17. Labour demand


Variables endogenous to both models:

C domestic credit
d real expenditure: in U.K. model, consumption and investment;
in RBA76, consumption only
F in U.K. model, stock of net foreign assets owned by U.K. residents; in RBA76, stock of net domestic assets owned by foreigners
i real imports of goods and services
M stock of money
P price of output
P price of exports
R international reserves
rb official interest rate: in U.K. model, Bank Rate;
in RBA76, bond rate
T total taxation receipts (in RBA76, modelled implicitly as T1 + T2)
x real exports
y real output, net of depreciation

Variables endogenous to RBA76 only:

A bank advances
B non-bank holdings of government securities
E exchange rate
I interest payments on government debt
K real business fixed capital stock
k real business fixed investment
L demand for labour (employment)
l change in demand for labour
N supply of labour (labour force)
P price of government current goods and services
T1 direct taxation receipts
T2 indirect taxation receipts
v real inventories of goods
W average weekly earnings

Exogenous variables:

cb real government cash benefits to private sector
g1 real government current spending
g2 real government capital spending
h required asset ratio for all banks
Pi price of imports, measured in $US
Pw world prices, measured in $US
Pwl wool prices, measured in $US
Q dummy variable to allow world prices relative to domestic prices to have a direct influence on inflation until 1971(3), but not afterwards
QA dummy variable for requests to limit advances, 1961
QD dummy variable for dock strike, 1969
QE dummy variable for exchange rate expectations, 1972 to 1975
QER dummy variable for timing of exchange rate changes, 1972, 1973, 1974
QF1 dummy variable for capital controls, 1973, 1974
QF2 dummy variable for capital outflow 1975(4)
QS dummy variable for credit squeeze, 1961, 1973
QUS dummy variable for devaluation of $US, 1973
rw world interest rate
t time
t1 average income tax rate
t2 average expenditure tax rate
t3 average tariff rate
to4 average payroll tax rate (constant)
WA award wages
z real net property income
£ expected rate of depreciation of exchange rate, % p.a. (in RBA76, modelled implicitly as a function of endogenous log EPw/p and exogenous QE)
A stock of official foreign debt
D is the differential operator d/dt
λ1 is the steady state rate of growth of real output
λ2 is the steady state nominal growth rate
λ3 is steady state rate of growth of world real income
λ4 is regular growth of real award wages


A list of the variables which appear in the model is included in Appendix A; D is the differential operator d/dt. The estimated model includes dummies for each world war, in asset and commodity demand functions. [1]