The%20analysis%20of%20Klein`s%20model%20

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The analysis of Kleins model The economic
fluctuations in the United States 1921-1941
(1950)

• Prepared by
• Aleksander Rzewuski
• Roman Gasowski

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Few words about Lawrence R. Klein

• born in 1920 in Omaha, Nebraska in Jewish family
• 1947 the book The Keynesian Revolution
  established him as one of the foremost scholars
  on Keynesian economics
• In 1980 he was awarded the Nobel Memorial Prize
  in Economic Sciences

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The goal of our presentation

• Introduction of Kleins model
• Estimation for data covering American economy in
  the period of 1921-1941
• Analysis of the results
• Estimation of the model for contemporary data
  (1970-2000)
• Comparison and final conclusions

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Background for Kleins model

• One of the first models to explain the economy as
  a whole
• Published in 1950
• It includes years of Great Depression till the
  beginning of American participation in World War
  II
• All variables are measured in billions of dollars

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Structural form of the model

• Endogenous variables of the model are
• Consumption Ct
• Wages in private sector Wp
• Investments It
• Capital stock Kt
• GNP Xt
• Profits in private sector Pt

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Structural form (contd)

• Exogenous variables are
• Government expenditure Gt
• Wages in public sector Wg
• Taxes Tt
• Lagged variables Pt-1, Kt-1, Xt-1

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Equations of the model

• Ct a 1 a 2Pt a 3Pt-1 a 4 (Wp Wg) u1t
• Wp ? 1 ? 2Xt ? 3Xt-1 ? 4t u3t
• It ß 1 ß 2Pt ß 3Pt-1 ß 4Kt-1 u2t
• Kt It Kt-1
• Xt Ct It Gt
• Pt Xt Wp Tt

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• Three-stage least squares regression
• --------------------------------------------------
  --------------------
• Equation Obs Parms RMSE
  "R-sq" chi2 P
• --------------------------------------------------
  --------------------
• c 21 3 .9443305
  0.9801 864.59 0.0000
• wp 21 3 .7211282
  0.9863 1594.75 0.0000
• i 21 3 1.446736
  0.8258 162.98 0.0000
• --------------------------------------------------
  --------------------
• --------------------------------------------------
  ----------------------------
• Coef. Std. Err. z
  Pgtz 95 Conf. Interval
• -------------------------------------------------
  ----------------------------
• c
• p
• L1 .1631439 .1004382 1.62
  0.104 -.0337113 .3599992
• -- .1248904 .1081291 1.16
  0.248 -.0870387 .3368194
• wp_plus_wg .790081 .0379379 20.83
  0.000 .715724 .8644379
• _cons 16.44079 1.304549 12.60
  0.000 13.88392 18.99766

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Interpretation

• Estimates of all parameters look very reasonable
• The point estimates are not sufficient
• The signs of the parameter seem to be expectable
  in the context of economic theory
• Most of the coefficients are significant
• Coefficient of determination (R2) for all
  equations is very high

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Observed level of GNP (solid line), simulated
level of GNP (dotted line)

• As many economists pointed out the model does not
  track the historical data well
• However it can be used to simulate various
  policies

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Possible way of policy simulation

• Change the value of government expenditure in one
  year holding all other levels of g and all other
  variables fixed
• Run the estimation with altered data and compare
  new under shock values of GNP with those
  obtained before
• Observe the difference in GNP and conclude policy
  recommendation

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Analogous analysis of contemporary data

• Data set covers the period of 1970 2000
• The data were gathered from World Development
  Indicators database and from Bureau of Economic
  Analysis of U.S. Department of Commerce
• All variables are measured in billions of dollars

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• Three-stage least squares regression
• --------------------------------------------------
  --------------------
• Equation Obs Parms RMSE
  "R-sq" chi2 P
• --------------------------------------------------
  --------------------
• c 30 3 76.55733
  0.9982 21791.42 0.0000
• wp 30 3 52.79923
  0.9973 12318.64 0.0000
• i 30 3 22.7667
  0.9179 322.08 0.0000
• --------------------------------------------------
  --------------------
• --------------------------------------------------
  ----------------------------
• Coef. Std. Err. z
  Pgtz 95 Conf. Interval
• -------------------------------------------------
  ----------------------------
• c
• p
• L1 -1.976323 .6102105 -3.24
  0.001 -3.172313 -.7803319
• -- 2.711593 .6818255 3.98
  0.000 1.37524 4.047946
• wp_plus_wg 1.312336 .0587717 22.33
  0.000 1.197146 1.427527
• _cons -186.1593 28.9765 -6.42
  0.000 -242.9522 -129.3664
• -------------------------------------------------
  ----------------------------

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Interpretation

• Coefficient of determination (R2) is even higher
• Most of the parameters are significant at the
  level of 1
• Model tracks the economy indicators well

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Final conclusions

• Both models follow the reality well
• Do they give any predictions?
• Only policy simulation
• Pioneer work and the cornerstone in the evolution
  of econometrics

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