Supply, Liquidity and Credit: a New Version of the Institute's Domestic Econometric Macromodel

Abstract

The forecast presented in chapter 1 was produced with a new version of the Institute's UK econometric model. Model 11 contains a number of new features. The largest number of innovations occur on the ‘supply side’ of the model, including new equations for manufacturing employment, investment, exports, imports prices and average earnings. Two equally important developments involve the interaction between company sector liquidity and decisions about real variables, and between the flow of consumer credit and personal consumption. There are new equations for the exchange rate, unemployment and a host of more minor variables. In all about half of the model's equations have been re-estimated, and 30 new variables added to the model. These changes constitute the largest and most significant development of the Institute's UK model since the introduction of rational expectations with Model 8. This note summarises these changes, and discusses their implications for various standard policy simulations. A full model listing is also published by the Institute.

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