The Moorish Wanderer

The Big Picture – Part 4

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 14, 2012

The standard RBC model has several major limitations that fail to account for proper results – in this case, a close match-up with summary statistics obtained after significant aggregates have been HP-filtered. The graph below for instance, shows a long-term comparison between actual GDP data, and RBC-generated output, the widening gap can be explained by the fact that savings in the standard RBC setup are exclusively domestic; recall capital accumulation dynamics:
$k_{t+1}=(1-\delta)k_t + i_t$
and National Accounting identities:
$c_t + i_t = y_t$
and
$y_t = z_t k_t^\alpha h_t^{1-\alpha}$
Obviously, if the Moroccan economy were to rely solely on domestic savings, capital accumulation would have grown at a lower rate, hence leading to smaller levels of output; furthermore, because Morocco is not an immigration country – meaning, demographic growth is endogenous- Capital dynamics account for a lot in terms of output growth, which vindicates the initial claim domestic savings are not high enough to explain the levels of investment observed over the past half a century.

This in my opinion is the strongest piece of evidence I would consider for pro-free trade policies: capital flows boost the economy, to the tune of 130Bn Dirhams every year since 1965, in real terms.

In addition to Balance of Payments issues, the RBC model needs to embed Government policies in the model’s intrinsic functions; Overall, RBC model described by an inter-temporal CRRA utility function and the resources constraints mentioned above yield the following:

HP Data     |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,08030|   1  |    1    |
------------+-------+------+----------
Consumption |0,07013|0,8734|  0,8215 |
------------+-------+------+----------
Investment  |0,22035|2,7441|  0,8369 |
------------+-------+------+----------
Government  |0,24127|3,0046|  0,4997 |
------------+-------+------+----------
Labour      |0,04256|0,5300| -0,8670 |
--------------------------------------
RBC         |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,06596|   1  |    1    |
------------+-------+------+----------
Consumption |0,04715|0,7148|  0,5092 |
------------+-------+------+----------
Investment  |0,20460|3,1018|  0,8766 |
------------+-------+------+----------
Government  |         No Data        |
------------+-------+------+----------
Labour      |0,00002|0,0003|  0,0238 |
--------------------------------------

Starting from the mid-1960s, Real GDP departed significantly from RBC-generated GDP. Incidentally, Morocco’s Balance of Payment picked up steam around the same time. (log-levels)

As you can see, the standard RBC model does pretty well in explaining cyclical fluctuations on GDP, household consumption and Investment dynamics – it exhibits lower levels of volatility for GDP, Consumption and Investment.

So even though synthetic data shows discrepancies like that of GDP’s, it retains similar features – in this case volatility, correlation and relative variance with respect to other aggregates.

The basic model provides powerful results, but not powerful enough to start building on forecasts and statistics-based predictions; there is a need for newly specified functions where foreign trade, government expenditure, and perhaps cross-correlated structural shocks are embedded.