Appendix - The Reduced-Forms’ Coefficients in Terms, of Fundamental Parameters
Leiderman, L., and A. Razin (1988a), “Testing Ricardian Neutrality With an Intertemporal Stochastic Model,” Journal of Money, Credit and Banking 20, pp. 1–21.
Leiderman, L., and A. Razin (1989), “The Saving-Investment Balance: An Empirical Investigation,” mimeo Tel-Aviv University, June.
Lucas, R.E., Jr. (1976), “Econometric Policy Evaluation: A Critique,” in K. Brunner and A.H. Meltzer (eds.) The Phillips Curve and Labor Markets, Carnegie Rochester Series on Public Policy; Amsterdam, North Holland.
This paper was written while the authors were visiting scholars in the Research Department, the International Monetary Fund.
What we have in mind is an inelastic total labor supply out of which government absorbs a certain part, leaving a residual for the private sector whose behavior is specified in equation (1).
A similar order of magnitude for costs of adjustment (2.4 percent of gross investment) is estimated for quarterly U.S. data by Shapiro (1986).
The steady-state and initial values are as follows:
For any variable yt, we define a permanent value
Evidently, one difference is that this shock leads to a decrease in the real wage while the productivity shock leads to an increase in the real wage.
A positive capital depreciation coefficient (i.e., d > 0) would, however, imply a fall in steady-state consumption.
Though the parameter values that we use are based on estimating the model for Israel in the 1980s, the model is applicable to many small open economies.
Evidently, this implies that the scale effect on investment of the labor input dominates the substitution effect.