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Development of a Stock-flow Consistent UK Macroeconomic Model for Policy Analysis


This work, which formed part of the macro component of the UK~IRC Business Services project, follows in the tradition of stock-flow modelling pioneered by the late Professor Wynne Godley. The research is not publicly funded. The modelling is used to inform strategic macroeconomic policy analysis of the UK economy. The work also provides a top-down perspective relevant and complementary to research on the balance of payments, led by Ken Coutts and Bob Rowthorn as part of the Services project. The project has produced numerous outputs since 2007 (see our Annual Reports section for details).

Macro-Economic Forecasting and Policy Analysis for the UK Economy

The project involves a team based at the CBR and at the Ulster University Economic Development Centre (UUEPC) in Belfast. The CBR team consists of Ken Coutts, Graham Gudgin and a PhD student Saite Lu based in development studies and Sydney Sussex College. Colleagues at UUEPC are Professor Neil Gibson and Jordan Buchanan. Dr Cam Bowie (no affiliation) is also member of the team with special reference to financial forecasting. Work during the year August 2016 until July 2017 consisted of three main strands:

  1. Maintenance and updating of the CBR macro-economic model of the UK economy (UKMOD). Two rounds of data revision have been completed largely by our colleagues at Ulster University. These were an Autumn 2017 update incorporating the 2016 National Accounts Blue Book data revisions, and a Spring 201 Provisional Update of 2016 data based on ONS Quarterly estimates and other revised data. Both are major exercises which keep the data-bases relevant for the most up to date forecast and scenario work.  With the revised data, a process of equation revsion also took place, as part of a fairly continuous process of model improvement. The UK macro-economic forecasts for 2017 were compared against the 2017 outturn data and also compared with the forecasts on the H M Treasury list of UK Forecasts. Although direct comparisons were not possible with the other UK forecasts which were quarterly (ours are annual), the CBR forecasts published in December 2015 were close to the most accurate of the 38 reported. We have not published a forecast report in 2017/18. The uncertainties caused by the Brexit Referendum result mean that short-term forecasts are dominated by somewhat arbitrary assumptions around the impact of Brexit-related uncertainty on business investment and household consumption. We are currently working on an Autumn 2018 forecast report for Northern Ireland and potentially also for the UK. While Brexit-related uncertainties remain important, there is now a year’s post-referendum data to guide us what the economic impact of the uncertainties are likely to be. 

  2. Work has proceeded further on the major extension of the CBR model to include a financial module (FINMOD) with a range of assets and liabilities for each sector. When completed this will make the model into a full-developed stock-flow consistent system along the lines laid out in Godley and Lavoie’s "Monetary Economics". Assisted by Dr Cam Bowie, we have constructed an outline accounting model and a database of financial assets and liabilities. Initial work has begun to insert a set of behavioral equations into the FINMOD system.

  3. Continuation of research evaluating studies of the economic impact of Brexit. In 2016/17 this involved the construction of a trade database and associated gravity models to estimate the economic impact of Brexit and the publication of two working papers. The key finding was that the official studies, of HMT and OECD used methods which exaggerated the negative impact of Brexit. In 2017/18 this work was extended to examine other studies beyond those using gravity models. This included the general equilibrium model approach used by the Centre For Economic Performance at the LSE. As with HMT much of the reported negative impact was shown to depend on a relationship between productivity and trade which itself depended heavily on the experience of emerging and less-developed economies rather than exclusively upon developed economies like the UK. Published evaluations using alternative approaches including that of Cambridge Econometrics and ESRI Dublin were also reviewed.

Bill Martin’s research is self-financed and output peer reviewed and published by CBR. His purely macro-modelling work ended in 2011, and was taken over by CBR colleagues Ken Coutts and Graham Gudgin. His work on the UK productivity puzzle continued until 2013 (a note published by NIESR) and restarted in 2017-18. Collaboration with Mr Oulton (LSE) and Professor Rowthorn led to the publication of "A Comment on Oulton, "The UK Productivity Puzzle: Does Arthur Lewis hold the key?" CBR WP498, March 2018. The comment continued the thesis explored in two CBR Special Reports: "Is the British Economy Supply Constrained? A Critique of Productivity Pessimism" (2011) and "Is the British Economy Supply Constrained II? A Critique of Productivity Pessimism" (2012), a report co-authored with Professor Rowthorn. 

The thesis is that the UK’s exceptionally weak productivity growth and shortfall since the financial crisis of 2007-8 arose from a combination of an effective demand failure and low wages. Oulton attributes low wages to the availability of Lewis-like plentiful supplies of immigrant labour. Martin and Rowthorn additionally consider other causes of low wages. Whatever the cause of cheap labour, Martin’s work agrees with Oulton that the UK result has been a contraction of full-employment capacity in line with constrained demand. In the first version of his paper, subsequently substantially revised reflecting my comment, Oulton argues that the exceptional shortfall in productivity stems from a shortfall in capital investment. But the data do not support that as a main explanation; rather the productivity shortfall is registered, largely or wholly, in a shortfall in UK total factor productivity. If so, echoing Abramowitz’s famous aphorism, Martin concludes that TFP would be a "measure of our ignorance" of the mechanisms that drove productive capacity to align with low aggregate demand.

Journal articles

Gudgin, G. Coutts, K. Gibson, N and Buchanan, J. (2017) "The macro-economic impact of Brexit: using the CBR macro-economic model of the UK economy (UKMOD)" Journal of Self-Governance and Management Economics, forthcoming, 2017.

Gudgin, G., Coutts, K., Gibson, N., Buchanan, J. (2017) "Defying gravity: a critique of estimates of the economic impact of Brexit" Policy Exchange, June 2017.

Coutts K. and Rowthorn R. (2013) "The UK balance of payments. Structure and Prospects" Oxford Review of Economic Policy, 29: 307-325. 

Martin, B., and R. Rowthorn (2013) "Can Intangible Investment Explain the UK Productivity Puzzle? A Response and Comment" National Institute Economic Review, 226: R42-R49. 

Martin, B. and R. Rowthorn (2013) "A rejoinder to Goodridge, Haskel and Wallis" National Institute Economic Review, 226: R54.

Book chapters

Coutts, K. and Laskaridis, C. (2018) ‘Financial balances and the development of the Ethiopian Economy’, in F. Cheru, F. Crame, and C. Oqubay, Oxford Handbook of the Ethiopian Economy (Oxford: OUP), forthcoming.

Gudgin, G. and Coutts, K. (2014) ‘Should the UK continue to follow liberal economic policies?’, in J. Green and C. Hay (eds.) The British Growth Crisis (Basingstoke: Palgrave Macmillan), forthcoming. 

Special reports

Coutts, K and Gudgin, G. The Macroeconomic Impact of Liberal Economic Policies in the UK, CBR Special Report April 2015

Martin, B. and Rowthorn, R. (2012) Is the British economy supply constrained II? A renewed critique of productivity pessimism, CBR and UK~IRC, May.

Martin, B. (2011) Is the British economy supply constrained? A critique of productivity pessimism, CBR and UK~IRC, July.

Martin, B. (2010) Rebalancing the British Economy: A strategic assessment, Centre for Business Research and UK~IRC, Cambridge and London, April.

Working papers

Coutts, K., Gudgin, G. and Gibson, N., "How the Economics Profession Got it Wrong on Brexit", Centre for Business Research, University of Cambridge Working Paper No. 493,  January 2018.

Martin, B., "A Comment on Oulton, ‘The UK Productivity Puzzle: Does Arthur Lewis hold the key?'", CBR WP498, March 2018.

Gudgin, G. Coutts, K. and Gibson, N. (December 2016), 'The macroeconomic impact of Brexit: using the CBR macroeconomic model of the UK Economy', Centre for Business Research, University of Cambridge, Working Paper No. 483.

Gudgin, G. Coutts, K. Gibson, N and Buchanan, J. (May 2017), 'The Role of Gravity Models in Estimating the Economic Impact of Brexit', Centre for Business Research, University of Cambridge, Working Paper No. 490.

Coutts, K. and Gudgin, G. (23015) ‘The CBR Macro-Economic Model of the UK Economy (UKMOD)’ 

Gudgin, G., Coutts, K., Gibson, N. (Ulster University), and Buchanan, J. (Ulster University).Centre for Business Research: UK Economy Forecast Report. Autumn 2015. CBR Special Report (November 2015).  

Gudgin, G. The UK macro-economy database was extended and updated in line with the 2014 Blue Book. In conjunction with Neil Gibson and Jordan Buchanan at the Ulster University Economic Development Centre software was created to manage changes in national accounts data, associated re-estimation of equations and other management tasks connected with the UK macro-economy dataset and the UKMOD model. 

Coutts, K. and Rowthorn, R. (2013) ‘De-Industrialisation and the balance of payments in advanced economies’ Foresight Future of Manufacturing Project, Evidence Paper 31, London: BIS. 

Coutts, K. and Rowthorn, R. (2013) ‘Update of prospects for the UK balance of payments’, Foresight Future of Manufacturing Project, Evidence Paper 30, London: BIS 

Coutts, K. and Rowthorn, R. (2013) ‘Re-industrialisation – a commentary’, Foresight Future of Manufacturing Project, Evidence Paper 32, London: BIS. 

Conference/Workshop papers

Gudgin, G. Conference on Legal and Economic Impact of Brexit, Peterhouse College, Cambridge. Paper on 'Economic Impact of Brexit', 30 March 2017.

Gudgin, G. University of Buckingham Conference on the Impact of Brexit. Paper on 'Economic Impact of Brexit', 26 June 2017.

Gudgin, G. Clash of the Titans conference, 'Short-term Forecasts for the UK economy in the context of Brexit', Royal Institution London, February 2017

Gudgin, G. ‘Not the OBR A Macro-economic Policy Model of the UK Economy with insights from Godley & Lavoie’, with Ken Coutts Post Keynesian Economics Study Group Annual Conference, Greenwich University, June 2016.

Gudgin, G. ‘A Macro-Economic Policy Model of the UK Economy. A Brexit scenario’, with Ken Coutts. Seminar paper given at Kingston University Department of Economics Seminar Series, October 2016. 

Gudgin, G and Gibson, N. gave a workshop on the UK macro-economic model at the Ulster University June 8th 2015. This was attended by civil servants and business representatives in Northern Ireland. 

Gudgin, G. Cambridgeshire County Council, East of England Forecasting Model Spring 2014 Forecasts and Dwellings Targets Scenario. This project organised by Oxford Economics Ltd provided forecasts, scenarios and advice for local authorities in the East of England co-ordinated by CCC. 

Gudgin, G. Workshop on better use of evidence for policy-making – EU Commission Brussels, 15/16 May 2014 

Gudgin, G. The Causes and Consequences of the Long Expansion 1992-2007. Clare College, Cambridge 19/20 September. 2013 


Gudgin, G. Two complete updates of the macro-economic datasets for the CBR Macro-economic model of the UK Economy. Work largely undertaken by colleagues at Ulster University (Prof Neil Gibson and Jordan Buchanan). The UKMOD database is now compliant with the 2016 ONS National Accounts Blue Book, with further data for 2016 using ONS quarterly statistics. 

Gudgin, G. New large scale trade dataset compiled by Prof Neil Gibson and Jordan Buchanan to facilitate research on gravity models. Innovative software written by Prof Gibson allowed partial datasets to be constructed for specified dates, giving considerable flexibility. 

Other publications

Martin, B. (2013) 'Capital Investment: what are the main long-term trends in relation to UK manufacturing businesses, and how do these compare internationally?' Foresight Project: The Future of Manufacturing Evidence Paper 8, Department for Business, Innovation & Skills, April, 2013.    

Martin, B. and Rowthorn, R. (2013) 'Can Intangible Investment Explain the UK Productivity Puzzle? A Response and Comment', CBR note, July.

Media coverage

Gudgin, G. Sunday Telegraph, Simon Heffer, "Impact of Brexit".

Gudgin, G. London Evening Standard, Anthony Hilton, "Economic Impact of Brexit". 

Markou, C. The Independent, (Several occasions).

Gudgin, G. Coverage received on launch of Liberal Markets report in the Observer and Guardian newspapers. 

Gudgin, G. Took part in 30 minute discussion on Share radio, London, 14 September on Liberal markets Report.

MPhil students supervised

Gudgin, G. supervised Saite Lu (Sydney Sussex College) financial Modelling in a Stock-Flow Equilibrium Context

Project team

Ken Coutts
Graham Gudgin
Bob Rowthorn
Neil Gibson (Ulster)

Project status