Model: Macroeconomic Model of an Economy
Economic Description
Tracks aggregate demand, capital stock, employment, production, income, inventory, interest rates, price levels and money supply.
Includes random shocks to
demand and production, which together with inventory cycles, yield a simple simulation of business cycles.
Mathematical Methods – Dynamic Stochastic Models
The model includes ten dynamic variables that have their own time evolution equations, plus 17 auxiliary functions defined in terms of
the ten main dynamic
variables, and about two dozen numerical parameters.
The model uses "system dynamics" methods that track stock and flow variables, and internal feedback loops. These methods are
applicable to dynamic models in
actuarial and investment management applications, especially as part of Monte Carlo models.
Acknowledgment
This model simulates the evolution of a national economy using one of four economic models of increasing complexity from "A
Dynamic Synthesis of Basic Macroeconomic Theory: Implications for Stabilization and Policy Analysis," by Nathan B. Forrester, thesis at
M.I.T. Sloan School of Management, 1982. URL: http://hdl.handle.net/1721.1/15739
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More Details About the Model
Show detailsThis model simulates the evolution of a national economy using system dynamics. The mathematical methods are useful more generally in dynamic stochastic models used in actuarial and investment management applications.
It has four economic models of increasing complexity.
- The first model is a basic macro-economic model of demand, employment and capital investment with normally distributed random shocks in aggregate demand and output. (The Light version)
- The second model extends the first model by adding a rudimentary financial market to the production economy. It has a variable interest rate and a variable demand for capital. The financial market model is based on the IS-LM model presented by Hicks in 1937. (The Standard version)
- The third model extends the second model by adding a variable price level with a constant money supply to the production and financial markets. It is based on the aggregate supply aggregate demand model. (The Advanced version without optional features)
- The fourth model adds an inventory adjustment mechanism. Adjustment of inventory is a significant factor in short-term business cycles. Meltzer outlined early macroeconomic inventory adjustment models in 1941. It also includes a lagged unemployment variable that does not affect the rest of the model and is used only for analysis. (The Advanced version with optional features)
Source: "A Dynamic Synthesis of Basic Macroeconomic Theory: Implications for Stabilization and Policy Analysis," by Nathan B. Forrester, Ph.D. thesis at M.I.T. Sloan School of Management, 1982. URL: http://hdl.handle.net/1721.1/15739
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