Model and Model-Driven Methodology

Model and Model-Driven Methodology

DOI: 10.4018/978-1-4666-6018-2.ch006
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This chapter specifies the empirical model used in the study, which is a Kaleckian post-Keynesian model, as an alternative to mainstream neoclassical theory. Having discussed the theory of financial intermediation in chapter two and commonality between post-Keynesian models of growth and endogenous growth theory in chapter three, this chapter postulates that financial development influences economic growth through different channels including investment, savings, and productivity growth. Later in the chapter, data characteristics, including stationarity, cointegration, and causality are reviewed. The chapter closes with a discussion about the main econometric modelling implemented in this research, including structural autoregressive modelling, impulse response analysis, and the variance decomposition method.
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6.2 The Theoretical Model

The model presented here is a Post-Keynesian open economy model, which is an extended version of Bhaduri and Marglin (1990). It consists of behavioural functions for investments, saving, and international trade defining the goods market and the producer’s equilibrium curve, which relates capacity utilisation to the distribution of income. For the sake of simplicity we follow Stockhammer and Onaran (2000a, 2004), considering the constraints on degree of freedom. In addition, due to the difficulty of estimating the behaviour of the public sector, it is left out of the analysis.

The goods market part of the model is similar to Bhaduri and Marglin (1990). Producer’s equilibrium, which is income distribution, is not determined only by the pricing behaviour of the firms, but also by a reserve army effect in a Marxian sense, reflecting the bargaining power of the workers. Employment is modelled by a version of Okun’s Law, following Stockhammer (2000b, 2000c). The goods market block of this model is augmented by a demand-driven labour market and technological change following Stockhammer and Onaran (2000a, 2004).

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