lagom_dsim
Below you find an extract from the documentation of lagom dsim. For the complete model and the complete documentation, please download the zip archive, by clicking here. Introduction The present document outlines a model for studying questions of long-term economic development with regard to Germany. In particular, it shall be used to address the challenge of developing effective climate policy under conditions of massive unemployment. The model is of the stochastic dynamic general equilibrium type: several markets interact with each other and with the production process, each of them is influenced by random events, and the overall trajectory of the system is governed by the dynamic co-ordination of demand and supply for the various goods considered. The model is a macro-model in the broad sense: optimizing agents are treated implicitly via the demand and supply functions that they bring about. The agents may be faced with all sorts of uncertainties. Some of these may cancel out at the macro level, others have their traces in random processes visible at that level. The model is not a macro-model in the narrow sense: for its dynamics, the formation of relative prices does matter.
In the model, markets are incomplete - as they surely are in today’s German economy. Therefore, the tra jectory of the system describes an evolution of temporary equilibria in the course of which economic agents can up-date their expectations on the basis of new experience. Markets are imperfect - as they surely are in today’s German economy as well. Therefore, producers are faced with falling demand curves for their products, and non-price signals such as unemployment and credit limits influence the working of the economy along with price signals. A defining feature of the model is the attention paid to the relation between market prices and reference prices, well-known from marketing, but all too often neglected in economics.
Two ideas guide the development of the model. First, in a situation of massive unemployment, Pareto improvements are possible. In particular, it is possible to design a climate policy that makes everybody better of by mobilizing idle resources. How such a policy can look like and whether it can reach the goal of avoiding dangerous interference with the climate system (as required by the UN framework convention on climate change) needs to be carefully assessed. For this purpose, the full-employment models used for most studies in climate economics must be complemented by long-term models representing unemployment. Given the level and persistence of German unemplyoment, developing such a model is particularly important in the case of Germany. The second idea refers to the dynamics of German unemployment. Wage costs per unit of output are not higher in Germany than in directly competing countries, profits are higher than at any time since decades, the fraction of profits going into net investment is at its lowest since decades, government debt - amplified by German re-unification - feeds opportunities to earn interest paid from taxes. These facts are hard to reconcile with the claim that the whole problem is one of rigid labor markets leading to exaggerated wage costs, but also with the claim that boosting effective demand by increasing government debt could solve the problem. Rather than advancing quick claims of knowing the answer, the idea then is to first patiently try to understand the question. From a climate policy point of view, this is all the more important as Germany has been a pioneer of climate policy for a long time. The ”red-green” German government has been a key player in bringing the Kyoto protocol to ratification. The idea that environmental policy could reduce unemployment by shifting tax burdens from labor to energy has been an important component of the ”red-green” vision. By now, this vision has lost much of its appeal. For the future of climate policy in Germany and elsewhere, re-assessing the relation between unemployment and climate policy is an important challenge. The proposed model shall help to tackle it. We begin by introducing product markets, represented as simple stochastic dynamical systems. The situation is very close to the standard interplay of supply and demand, but it has acquired a dynamic character by taking into account in a coarse, but effective way two important facts of economic life: short-term discrepancies between demand and supply are handled by adjusting inventories, and unsatisfactory levels of inventories induce producers to cautiously modify market prices. (...) |
