LAM modelling of East European economies: Methodology, EU accession and privatisation

In: In: (Proceedings) EcoMod2002 Conference on Policy Modelling. EcoMod Network: Brussels. (2002)

Abstract

The paper presents a new approach to modelling economies in transition, where the adjustment processes are often nonlinear and data series are short. The model presented in the paper, the LAM-3 model, is the latest development in a series of long-run adjustment models, used for simulation and forecasting of several East European Economies. In particular the model contains short-run equations with bilinear error correction derived from a structural vector autoregressive model. The paper also gives derivations of two long-run relationships of the model, those for full-capacity output (reformable and non-reformable labour) and the relationship linking prices, money, incomes and exchange rates. The short-run part evolves around the specification of price and wage dynamics according to the NAIRU principle. Due to the fact that series of data for Eastern European countries are short, the parameters are evaluated with the use of global optimization technique (repetitive stochastic guestimation) rather than by a traditional econometric method. The model was estimated and applied for Czech Republic, Estonia, Latvia, Lithuania, Poland, Slovak Republic, Romania and Ukraine. For each country it consists of 3 long-run and 21 short-run relationships. Examples of simulations presented here evaluate European Union accessibility through inflation correlation measures and Aghion-Blanchard optimal speed of privatisation.