A Small Macro-Econometric Model

Different sizes of macro-econometric models are used for different policy purposes. In this paper, we introduce a small macroeconometric model that includes macro-aggregates variables that can be solved dynamically and be used as a sample model to be estimated for other countries.


Introduction
The largest-scale macro-econometric model for Iran performed by the author is a high detailed model, and working with it is more cumbersome for those who need a general forecast scheme for major macro-variables. Indeed this model is used to draw a simple working scheme to fulfill general view's needs. In addition to its simplicity, this model substantially has a good performance. This model compromises the fiscal position of the government; a well understood transmission mechanism between monetary aggregates, price level, production, and balance of payments.

The Model
A very simple monetary model is presented according to the monetarist's view. The following flow chart presents the relationship between the main variables of the model. As it is seen, the liquidity is decomposed to the net domestic assets and net foreign assets of the banking system. The net foreign asset component is affected by the official exchange rate and the balance of payments. The net domestic assets consist of three components: private sector debt to the banking system, government debt to the banking system, and net of other assets. The private sector debt to the banking system is affected by gross domestic product (GDP). The government debt to the banking system is influenced by the government budget deficit and foreign exchange obligations account. The price level is defined as a function of liquidity. Change in GDP is affected by the balance of payments. The estimated results are presented in the following section. The econometric model was estimated by OLS technique. The sample period covers 1960-2001. To avoid integration problem, all level variables are used in their first differences.   As it is seen in the estimated results, the net foreign assets of the banking system has a positive significant relationship with the balance of payments. The coefficient on C(21) is positive and significant, supporting a positive link between the government budget deficit and the government debt to the banking system. Equation (5) suggests that nominal GDP is positively and significantly related to the liquidity, supporting the monetarists' view. In other words, any change in the money supply will affect the nominal GDP. In addition, net private sector debt to the banking system is positively and significantly correlated with nominal GDP. Equation (6) suggests that real GDP at fixed prices is positively and significantly related to the BOP. In Iran, the interest rate does not affect the real output. Indeed, monetary transmission policy affects the general price level, leaving trivial effects on the real output. Graph

Dynamic Simulation
To evaluate the performance of the model, we solved the whole system for the whole ex-post sample period through dynamic simulation. Graph 2 plots the actual value of the endogenous variables versus their simulated values. The 8 plots of Graph 1 show the high dynamic response and credibility of the model to build simulated series as near as the actual series with a concordance of turning points.

M2LPV
As it is seen, the model simulation has a good performance and can be used for policy evaluation and forecasting purposes.
This small model is an adaptable model that can be used for other countries as well.