SLIM, a small linear interdependent model of eight EU-member states, the USA and Japan

In this paper we present a small estimated multicountry model of eight EU member states (Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands and the UK), the USA and Japan, in which international linkages are directly modelled. Our starting point is a modified version of the theoretical two-country Mundell-Fleming model. This model is extended in three ways. First, it is extended to more than two countries using the principal trading pattern of each individual country. Second we extended the model by including country specific labour market characteristics, wage-price spirals and long-term interest rates. Third, we included dynamic responses into the model which makes it possible to distinguish between short- and long-run behaviour of the economy. In each country direct linkages are modelled through outputs, prices, exchange rates and interest rates. For estimation we use annual data for the sample period 1960-91. This estimation process is based on partial adjustment and error-correction arguments. Historical simulations and shock analysis are performed to show various properties of the model and the outcomes of the model are compared with those for existing models in literature. Due to its linearity and the strong international linkages, the model is suited for dynamic game applications.

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