Dynamic variable input-output (VIO) model and price-sensitive dynamic multipliers

The conventional multipliers of macro economic models, econometric models, Computable General Equilibrium (CGE) models with fixed industrial purchase I/O coefficients, and Leontief Input-Output (I/O) models are price-insensitive. On the other hand, the multipliers of the Dynamic Variable Input-Output (VIO) model have the advantage of being price-sensitive. The Dynamic VIO model extends the static single regional version of the Multi-Regional Variable Input-Output (MRVIO) model, which is a hybrid of Computable General Equilibrium (CGE) model and the further developed Leontief's dynamic Input-Output (I/O) model. The Dynamic VIO model, which incorporates time dimensions, can describe the actual situations more accurately while maintaining computational simplicity. Under this model, both technical coefficients and capital stock requirement coefficients include price terms, and they become variable instead of being fixed. By using the 15 sector industrial transaction table derived from the 1987 U.S. Benchmark input-output table, and by assuming constant technology during the years of 1987–1991, I estimate the dynamic equilibrium price changes due to wage rate changes and measure the effects of the relative equilibrium price changes on output, income, and employment multipliers that are spread over the time periods. The dynamic multipliers of the Dynamic VIO model include both pure spending effect and substitution effect in the presence of input cost changes such as wage rate changes. The substitution effect is the relative equilibrium price change effect, and it occurs due to the substituting behavior of firms and consumers seeking cheaper products. Actual economic impacts that we observe in a given time period, as the result of government spendings, are the total cumulative effects of the current and previous time periods. The empirical analysis shows that wage rate changes during 1987 through 1991 give statistically significant effect on mean equilibrium price changes for the total of five years and for each time period except the immediate time period (lag 0) under 1% level of significance. As for the immediate time period (lag 0), mean equilibrium prices are same between the two groups of wage rate-change and no-wage rate-change cases. Nevertheless, equilibrium price changes affect output, income, and employment multipliers significantly. Hypothesis tests show that significant differences exist in mean output, income, and employment multipliers between the two groups of wage rate-change and no-wage rate-change cases for each time lag (1–4) and for the total of five time lags. The dependent t-test is applied to the paired data. The study concludes that substitution effects do alter mean output, income, and employment multipliers for each time lag (1–4) and for the total of all five time lags under 1% level of significance. Furthermore, the study finds that mean multipliers of output, income, and employment under the wage rate-change case are smaller than those under the no-wage rate-change case. For the immediate time period (lag 0), the significance level should be increased to 2%, 13%, and 5%, respectively, to support the claim that mean multipliers of output, income, and employment are different between the two groups, and that mean multipliers of output, income, and employment of the wage rate-change case are smaller than those of the no-wage-rate change case. These strong empirical results demonstrate the capability and usefulness of the Dynamic VIO model for measuring government spending effects in terms of price-sensitive dynamic multipliers.