A model of New Zealand’s post-war inflation

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THESIS SUBUT"IID TO

THE:

UNIVERSITY OF AUCKGAND FOR THE DX- OF

DOCTOR OF PHILOSOPHY

A MODEL OF V

----

^ZJUMD'S

V.E.

Hall

Department o f E oonomics University of Auclrland

June 1971

To t h e many people who have l x l p e d i n ,any '~7ay with this -thesis, I extend my s i n c e r e thanks.

I a m g r a t e f u l t o those members, bo-th p a s t and p r e s e n t , of the Department of Economics f o r 'clie t r x h i n g they have given me, and i n particula.r, 'cb,nks go t o Professor A.K. Bergs'crom, P r o f e s s o r G,P. Braae, ,and P r o f e s s o r C.G.F. Simkki.

S p e c i a l thanks i n connection t;Ti.th t h i s t h e s i s go t o m y supervisors, Professor

A.R.

Bergstrom and Prof'essor G.P. Braae. Both have givon most f r e e l y and p a t i e n t l y of' t h e i r time and a,dvice, M r I-I.J. Baas and M r P.G.B. Plzillips have a l s o h e l g f u l comments on a s p e c t s of the

research, &iy inadequacies o r e r r o r s which m.y be present a r e , however, my o m r e s p o n s i b i l i t y ,

I a.m grat;eilul t o my father-in-lati, M r

L.C.

Hansen, f o r h i s valuable comments on grammar and s t y l e .

Tlirs J a n e t T k l f ord has 'cypeci a dif Picul'c s c r i p t c h e e r f u l l y and meticulously, and I s i n c e r e l y appreciste h e r f i n e ePro1-t.

The K e l l i h e r E c o n o s R i c $ ' , ' P i j ~ ~ . ~ i ent;, $.t-qq~gli their Bursavj, have

,!?. ' ^,I

,,

,,

provided, Trom September

1970,

generous f i n a n c i a l a s s i s t a n c e .

I wish t o thanlc m y parelits f o r t h e opportunity of a u n i v e r s i t y ed-ucation and f o r Lhe inJceres-t and encouragemen'c they have ex-tended.

My greates'c debt i s t o nly wife, E l a i n e ; h e r help and encour~.@ment have m a e it p o s s i b l e t o comple-i;e -this research in t h e t i m e avcr.il~ble.

CHkPTER 1

-

INTRODUCTION

CKAPTEX 2

-

^{PRICE MOVEMENTS ITl3yI zlQ.U!!D SIN(SE:}

WORLD WAR

I1

2.1 R e p r e s e n t a t i o n of' P r i c e Movements

2,2 Movements i n t h e 811 Grov.ps Consumerst P r i c e I n d e x s i n c e I

945

CHAPmR

3. -

^A BASIC THEORETICAL iVIOIIEL

3

.I The Approach

3.2

The Model S t a t e d

3.3

The Model E x p l a i n e d

3.31

The Equations a n d t h e V a r i a b l e s I I The Number of E q u a t i o n s

3.31

2 The V a r i a b l e s

3.32 Lag S t r u c t u r e

3.33

The P r i c e E q u a t i o n

3.34

The Ao'cual Wage E q u a t i o n

3.3 5

The Minimum Wage Eqw: 'cion

3.36

The Labour D e m d E q u a t i o n

3.37

The Labour Supply Equa.tion

3.38

The Reduced Form Income D e t e r m i m t i o n E q m t i o n

3.4

The fi1odel i n E s t i m t i o n Form

3.,5

S o l u t i o n of tlie Model

3.51

The " E q u i l i b r i d ' Values

3.52

The C h a r a c t e r i s t i c Dynamic P r o p e r t i e s

'p?&'mR 1 k

-

ESTIIIATION AflD RXVISIOI\T OF THC MSIC m i : ~ L TdODEL The Apprcmch t o Estimation

The B a s i c Model

The Basic Cobb-Douglas Production F u n c t i o n Model 4.31 Theory

1&.32 E s ' c i m t i o n

The E x p l i c i t In'croduc-Lion of F i x e d C a p i t a l 4.41 P i x e d Capi-La1 Represented

l+.l+2 F i x e d C a p i t a l E q l a i n e d

4.431

^{The CES} P r o d u c t i o n Func.Lion Model

4.Lc32

The Cobb-Douglas Froduc-tioli Function Model

4. LA

Simultaneous Equa'cion E s t i m a t i o n

Lc.14-I

The CES P r o d u c t i o n Func-tion Model lc.4.?+2 The Cobb-Dou&as P r o d u c t i o n Function

M ode1

The Parameter lc Constra.ined

4-.51

Theory

4,511

The CES P ~ o d u c t i o n F u n c t i o n Model

4.51

2 The Cobb-Douglas P r o d u c t i o n Function Nodel

Lk.52 Simultaneous EquaJcion E s t i m a t i o n

4.521

^{The CES} Prod-uction F u n c t i o n Model

4..522

The Cobb-Douglas P r o d u c t i o n F u n c t i o n Model

4.523

The Model S e l e c t e d

The Nonconstant Returns -to S c a l e CES P r o d u c t i o n F u n c t i o n Model

The Ha.rrod-Neu'cral G S P r o d u c t i o n F u n c t i o n Model L i m i t e d In-2'ormation Maximum L i k e l i h o o d E s t i m a t i o n

CHAPTER

5 -

^SORE FURrPDR ES'I'D,IATIOD?S : SEMI-ANNUiA DATA, &ID A DIFifEIG3NTW EQUATIOI\T S YSTEN

5.1

Semi-annual Data

5

.II The Approach t o % sJcima.-tion

5.1

2 Ordinary Least S y m r c s Zstimakion

5.1 3

Simultaneous E q u a t i o n Eskism'cion

5.131

E s t i m a t i o n by Two S t a g e L e a s t Squares

5.1

32 E s t i m a t i o n by Limited I n f o r m a t i o n

Iflzximm Lilcelihood 5.2 A DifPerenJcial E q u a t i o n System

CHAPTER

6 -

GONGLUSIODT

6.1 The Most S a t i s f a c t o r y Model G.? I Dynamic P r o p e r t i e s

6.1 I I C l i a r a c t e r i s J c i c m a m i c P r o p e r t i e s 6.1 I 2 Responses -to S e l e c t e d Exogenous Shocks 6 ,I 2 P r e d i c t i n g Power

6.2

Summary of P r i n c i p a L Fhdings

AFPENDIX I

-

DATA SOURCES

APPENDIX

I1

- ^PRINCIPAL

STA!I!ISTICS USED