Lift Model
The Inforum Lift (Long-term Interindustry Forecasting Tool) model is unique among large-scale models of the U.S. economy. Combining an interindustry (input-output) formulation with extensive use of regression analysis, it employs a "bottom-up" approach to macroeconomic modeling. For example, aggregate investment, total exports, and employment are not determined directly, but are computed by the sum of their parts: investment by industry, exports by commodity, and employment by industry. Indeed, Lift contains full demand and supply accounting for 97 productive sectors. Additional detail is provided by a second Inforum model, Iliad, which features 360 sectors. Other U.S. models, including a quarterly macroeconomic model, a national demographics model, and regional models, also are available.
In short, the demand/production block of Lift uses econometric equations to predict the behavior of real final demand (consumption, investment, imports, exports, government) at a detailed level. Then, the detailed predictions for demand are used in input-output production identity to generate gross output (total revenue adjusted for inflation). Lift's approach to projecting industry prices is similar. Behavioral equations estimate each value-added component (e.g., compensation, profits, interest, rent, indirect taxes) for each industry. Value added per unit of output is then combined with the prices of intermediate goods and services with the input-output price identity to form an indicator for industry prices. Prices by industry are also dependent on measures of slack in each industry, and, in some cases, international prices. Thus, income and prices are directly related and are consistent. In turn, relative price terms and income flows are included as independent variables in the regression equations for final demand, creating a simultaneity between final demand and value-added.
This bottom-up technique possesses several desirable properties for analyzing the economy. First, the model works like the actual economy, building the macroeconomic totals from details of industry activity, rather than distributing predetermined macroeconomic quantities among industries. Second, the model describes how changes in one industry, such as increasing productivity or changing international trade patterns, affect related sectors and the aggregate quantities. Third, parameters in the behavioral equations differ among products, reflecting differences in consumer preferences, price elasticities in foreign trade, and industrial structure. Fourth, the detailed level of disaggregation permits the modeling of prices by industry, allowing one to explore the causes and effects of relative price changes.
Despite its industry basis, Lift is a full macroeconomic model, with more than 800 macroeconomic variables determined consistently with the underlying industry detail. This macroeconomic "superstructure" contains key functions for household savings behavior, interest rates, exchange rates, unemployment, taxes, government spending, and current account balances. Like in an aggregate macroeconomic model, this structure insures that Lift exhibits "Keynesian" demand driven behavior over the short-run, but neoclassical growth characteristics over the longer term. For example, while monetary and fiscal policies and changes in exchange rates can affect the level of output in the short-to-intermediate term, in the long term, supply forces -- available labor, capital and technology -- will determine the level of output.
Another important feature of the Lift model is the importance given to the dynamic determination of endogenous variables. For example, investment depends on a distributed lag in the output growth of investing industries and imports and exports depend on a distributed lag of foreign price changes. Therefore, Lift model solutions are not static, but are fully capable of projecting a time path for the endogenous quantities.
Finally, the Lift model is linked to other, similar models with the Inforum Bilateral Trade Model (BTM). Countries included in this system include the U.S. , Japan , China , and the major European economies. Through this system, sectoral exports and imports of the U.S. economy respond to sectoral level demand and p rice variables projected by models of U.S. trading partners. In summary, the Lift model is particularly suited for examining and assessing the macroeconomic and industry impacts of the changing composition of consumption, production, foreign trade, and employment as the economy grows through time.
The current model is the fourth discrete version of a modeling framework that has been in continuing existence since 1967. Since its inception, Lift has continued to develop and change. We have learned more about the properties of the model through working with clients, and in doing our own simulation tests. We have learned about the behavior of the general Inforum type of model, from work with our partners in other countries. Finally, through many experiments, we have learned that many principles of economics, while attractive theoretically, are difficult to implement practically. We will continue to experiment, and share ideas, and bring the models closer to our vision of what they should be. A more detailed description of the Lift model can be found here.