Consumption and investment in the BOF4 quarterly model of the Finnish economy

Juha Tarkka, Alpo Willman and Hanna-Leena Männistö

No 9/1989, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This report describes the determination of private consumption and investment in the BOF4 model. The consumption function of the model is largely based on thepermanent income hypothesis. Relative prices and the level of aggregate consumption determine the shares of the three consumption subgroups included in the aggregate. The non-residential investment equations are derived from the capital owners' intertemporal profit maximization problem in accordance with the neoclassical investment theory. Modelling of residential investment is based on Tobin's approach and that of inventories on the buffer stock-accelerator approach. The properties of the equations are illustrated by means of tables of dynamic elasticities throughout the paper.

Date: 1989
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