Autonomous demand, expectations and calibration: simulating demand-led growth

The paper investigates key issues within the literature on demand-led growth from the standpoint of the less-explored problem of calibration in macroeconomic models. The role of autonomous demand, the long-run convergence on normal utilization and the utility of steady-state analysis are considered by means of a multi-commodity simulation model of demand-led growth. The model brings with it the challenge of calibrating sectoral capital to output ratios consistent with reported estimates of the aggregate output to capital ratio. Key complexities are the dependence of the measured aggregate ratio on relative prices, the implied lower limits on sectoral ratios and the upper limits required for stability. The model simulates responses to an autonomous demand shock in two different settings: for a once-over shock in the rate of growth of autonomous demand and where this rate is subject to random fluctuations with a shock to its mean rate of growth. For the latter case, a simple Monte Carlo experiment is performed to enable comparison of the two different settings. Simulation results provide a basis for discussion about expectations in the context of demand-led growth and the significance of long-run divergences of actual utilization in relation to a normal rate.