# Introduction

A series of multiplier analyses that illustrate the properties of ADAM are presented below. The calculations are made with the model version October 2012 using the baseline lang13.

The model version October 2012 replaces the previous model version from December 2009. The main changes in the October 2012 model version are mainly due to the implementation of revised working hours in the National Accounts. The current model version is described in tmkxxzzyy and other papers that can be found on ADAM's homepage.1) ADAM's homepage describes new versions of ADAM. Changes in the model and other analysis are documented in a series of papers on the homepage. ADAM's homepage describes new versions of ADAM. Changes in the model and other analysis are documented in a series of papers on the homepage.

The multipliers are calculated relative to a baseline.A baseline represents a solution with respect to the endogenous variables given a stylized projection of the exogenous variables. The present baseline, Lang13, is based on the historical data bank from april 2013 that contains annual historical data up to and including 2012. The baseline is based on a scenario with steady state growth that is driven by growth in productivity.

The growth rates chosen are based on historical growth rates in the Danish economy. Demography and labor supply are assumed to be unchanged. So that the number and structure of the population is projected to be unchanged. Productivity growth in the Danish economy is assumed to be 1.5 percent. The growth in the market for Danish exports is likewise assumed to be 1.5 percent. Import and competitive prices in the export market are assumed to grow by 2 percent annually. In steady state the domestic prices and costs will grow parallel with foreign prices, and the Danish GDP will be growing by 1.5 percent annually.

The development in productivity and inflation is achieved by assigning the growth in productivity to labor and this is reflected by a corresponding increase in real wages of 1.5 percent. The real interest rate is constant and fixed at 1.5 percent, like the growth rate of labor productivity. Thus, the Danish economy can grow in steady sate with unchanged demand structure, unchanged composition of output and income, unchanged economic policy, unchanged tax and expenses burden, and unchanged sectoral composition etc. The degree of compensation is also unchanged and the equilibrium level of unemployment is approximately 100.000 (4 per cent).

Overall, it is a baseline of the Danish economy repeating itself in to the future roughly as we know it today with a real growth of 1.5 percent and an inflation rate of 2 percent. In the short term, it is necessary to allow deviation in certain areas so that the equilibrium scenario is achieved within a short time frame. For a discussion of the structure and construction of the baseline bank see chapter 10 in the ADAM book, also available for download at ADAM's homepage.

The multipliers are calculated relative to this baseline. The experiments are carried out by changing one or a few of the exogenous variables. Then the model is simulated to calculate the effect on the endogenous variables. There is no provision for possible ties between the exogenous variables. This means that one has to be careful in the interpretation of the experiments as real world economic events are rarely confined to changes in one exogenous variable.

It is worth noting the premise that the economy is initially in equilibrium, this means that the experiments describe a process where the economy first drifts away from equilibrium in the short run and in the long run achieves a new equilibrium. Economic policy measures are often taken in the opposite situation, namely when the economy is out of equilibrium. The policy tools are used to mitigate crisis or overheating of the economy in the short run (and perhaps to counter potential long term consequences, e.g. to avoid deterioration of the number and skills of the workforce during a crisis).

It should also be noted that the standard version of ADAM has no fiscal reaction function that is automatically activated in order to keep the government budget in balance. Without a reaction function the government budget balance can become permanently negative or positive depending on the experiments. It may be appropriate to accompany the initial exogenous input with other fiscal instruments say a tax change to balance the public budget, see section 18 and 19.

The discussion on each of the experiments is presented briefly, a detailed discussion of the key mechanisms in ADAM can be found in chapter 11 in the ADAM book.

The experiments are the following

1. | General government purchase of goods | 11. | Labor supply - working hours
2. | General government employment | 12. | Productivity - labor efficiency
3. | General government investment in buildings | 13. | Productivity - machinery efficiency
4. | General government investment in machinery | 14. | Productivity – efficiency of all factors
5. | Foreign demand | 15. | Interest rates
6. | Income tax rates | 16. | Private consumption
7. | Indirect tax rates | 17. | Hourly wages
8. | Foreign prices | 18. | General government purchase of goods, balanced
9. | Oil prices | 19. | Labor supply - early retirement scheme, balanced
10. | An increase in labor supply |  |

All experiments expand economic activity. In some of the experiments the effect is temporary and in others the effect is permanent. In general, a demand shock in ADAM like an additional public purchase of goods affects production and employment in the short run. However, in the long run a demand shock has no effect on employment. In contrast, a supply shock such as an increase in the labor force has a permanent effect on employment. This is in line with most models of a small open economy with a fixed exchange rate and a Phillips curve.

In the first half of the experiments, the shock expands aggregate demand. In most cases policy instruments are used to stimulate domestic demand, and in other cases foreign demand for domestic goods and services changes. Experiment 1-4 and 6-7 present a shock to policy instrument variables. In all cases the shock is chosen so that it has a direct impact of 1000 million kroner on public budget in the first year. Experiment 5 and 8-9 introduce a shock to foreign demand.

Experiment 1-5 affect the volume of aggregate demand directly. In experiment 6, demand increases indirectly due to an increase in disposable income. In experiment 7-9 aggregate demand also expands indirectly through the effect on prices.

Experiment 10-15 present supply shocks. Experiments 10-12 are different shocks to the labor supply. Experiment 12, just like experiment 13-14, is at the same time a shock to productivity, so that it can be compared with experiment 10-11 and experiment 13-14. Experiment 15 describes a shock to interest rates.

Experiment 16 and 17 show the effect of a temporary shock to two of the model's central equilibrating mechanisms, namely private consumption and wage formation. In experiment 18 and 19 the effect of a budget restriction is introduced. Experiment 18 repeats the public purchase of goods and services experiment (section 1), while experiment 19 is a shock to labor supply just like experiment 10. Thus the effect on a budget restriction is shown both for a demand shock and a supply shock.

Finally we should note that comparison with models from other countries is difficult, for example due to budget restriction. Special Danish conditions (regulatory mechanisms in taxes and transfers etc) makes comparison with other countries difficult. As mentioned the interest and exchange rates are exogenous. Not also that expectations in ADAM are adaptive or constant, i.e. constant inflationary expectations reflecting the constant exchange rate.

A similar document for the previous model, December 2009, can be found here.