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A Simulation of the United States Economy in Recession

James S. Duesenberry
Otto Eckstein
Gary Fromm

Abstract

To test the vulnerability of the U.S. economy to depression, an econometric model has been built, which seeks to put the automatic stabilizers in a realistic macroeconomic setting. This model makes it possible to estimate the impact of alternative time patterns of decline of fixed investment and government purchases on the quarterly national income accounts, particularly on GNP. The model is also used to discover the implications of new potential policies, particularly improvements in the automatic stabilizers. A simulation approach is employed to study the effects of the error terms in the equations, both to see the forecasting potential of a model of this sort and to test whether errors lead to cumulative deviations from the expected path of the system.