Structural Change and External Shocks: Some Simulations using a Model of the Swedish Economy

Bergman, L. (1983). Structural Change and External Shocks: Some Simulations using a Model of the Swedish Economy. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-83-048

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Abstract

During the 1970s the industrialized economies experienced a significant drop in labor productivity growth rates as well as two-digit rates of inflation. Together with other phenomena such as the emergence of the so-called Newly Industrialized Countries, these events have been interpreted as signs of a major shift in the pattern of economic development in the early industrialized world.

Economists trying to identify the major forces behind this process, for instance Lindbeck (1983), tend to point to several different factors of which some have been operating for a long time. The abruptness of the change in economic trends, however, to a large extent is assigned to the "shocks" in the form of dramatic increases in the prices of oil and other raw materials, as well as to the ensuing recession, experienced in the beginning of the 1970s.

The purpose of this paper is two-fold. The first is to analyze the impact on a national economy of the type of "shocks" experienced in the 1970s within the framework of a computable general equilibrium model implemented on Swedish data. The second purpose is to compare the computed impact of the oil price "shock" with the corresponding impact of the most recent shock, the increase of real interest rates. The underlying issue is obvious: were the raw materials price increases a major factor behind the bad economic performance in the 1970s, and if so, is it likely that the upward shift in real interest rates will have equally detrimental effects?

The choice of method for this analysis has some implications which should be pointed out already at the outset. Thus, as the model essentially is designed as a neoclassical general equilibrium model, goods and factor prices are assumed to be flexible enough to clear all goods and factor markets in each period. Moreover, it does not contain financial markets. This means that the analysis, at best, can shed some light on the direct impact of changes in external prices and interest rates on real variables, while indirect effects, induced by malfunctioning goods and factor markets, real effects of higher inflation rates and various policy reactions, are disregarded.

To some extent this obviously limits the value of the analysis. On the other hand the partial nature of the analysis provides an opportunity to evaluate the relative importance of direct and indirect effects of the type of external shocks experienced by the industrial national economies during the last decade.

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