*make a directory called models in G:drive

*G:\> md Models
* G:\> cd Models
*put ISLM.gms file and pfe32.exe editor in G:\>models directory
* N:\special\ec\gams\gams islm.gms to run scenarios of ISLM model.
*check the list file ISLM.LST for results and analyse the result. Are the results consistent with 
*the ISLM diagram for exapnsionary fiscal and monetary policies.
* student version of gams is available free at www.gams.com 

$Title A simple IS-LM open economy model of income and interest rate determination

parameter 
	c0 	autonomous consumption
	b	marginal propensity to consume 
	g	government expenditure
	mu0	autonomous imports
	mu1 	propensity to import
	i0 	autonomous investment
	i1	slope of investment function	
	mp	real money balances
	t1      tax rate
	f	transaction demand for money
	k	interest demand for money
	eta	sensitivity of export to the exchange rate 
	meta    sensitivity of import to the exchange rate
	ka	capital inflow
	v       velocity of circulation
;

*assign values to the parameters of the model
	c0 = 200;
	b=0.75;
	g= 100;
	i0= 50;
	mu0 =20;
	mu1 =0.2;
	mp =100;
*x=100;
	f=0.2;
	k=-60;
	i1=-5;
	t1=0.3;
	eta=50;
	meta=-30;
*er=2;
	KA =-150;
	v=5;


variables 
	c 	consumption
	y	income
	I	investment
	M	imports
	T	taxes
	r	interest rate
	tb	trade balance
	bd	budget deficit
	si      saving investment gap
	x       exports
	er      exchange rate
	p	price level
;

equations
ec	Consumption function
et	tax function
ei	investment function
em	import function
ey	goods market equilibrium
emm	money market equilibrium
etb	trade balance condition
ebd     government dudget devicit
esi     private sector saving investment identity
err     exchange rate
ex      export equation
eprice  price equation
;

* Structural model

*consumption function
ec..
	c =e= c0+b*(y-t1*Y);

*tax function
et..
  	T =e= t1*Y;

*investment function
ei..
  	i =e= i0+i1*r;

*import function
em..
   	M=e= mu0 + mu1*Y+meta*er;
*export function
ex..
	X=e= eta*er;
*nationa income identity (IS curve)
ey..
	y=e= c+i+g+x-M;

*money market equilibrium (LM curve)
emm..
    	mp =e= (f*y +k*r);

*trade balance
etb ..
	tb=e=X-m;
*government budget balance
ebd..
        bd =e= T-g;

*private sector saving
esi..
	si =e=y-c-t-i;

*BOP condition
err..
	tb+ka =e=0;
eprice..
	P*y=e=(mp*v);

*declaration of fix price model

model ISLM /ec,et, ei, em,ex,ey,emm,etb, ebd,esi,err/;

*GAMS solver
solve ISLM using mcp;


* results in readable format based on model solution

parameter 
result   basic solution
result1  expansionary fiscal policy
result2  expansionary monetary policy
result3  expansionary fiscal and monetary policies
result4  flexible price model
;

result("consum")=c.l;
result("income")=y.l;
result("intrest")=r.l;
result("imports")=m.l;
result("taxrev")=T.l;
result("invest")=T.l;
result("trade-gap")=tb.l;
result("budget-gap")=bd.l;
result("s-invgap")=si.l;
result("exrate")=er.l;

*counterfactual experiment 1
* impact of expansionary fiscal policy

G = 200;
t1=0.15;
solve ISLM using mcp;

result1("consum")=c.l;
result1("income")=y.l;
result1("intrest")=r.l;
result1("imports")=m.l;
result1("taxrev")=T.l;
result1("invest")=T.l;
result1("trade-gap")=tb.l;
result1("budget-gap")=bd.l;
result1("sav-invgap")=bd.l;
result1("exrate")=er.l;


*counter factual experiment 2
*expansionary monetary policy

G = 100;
t1=0.2;
mp =300;

solve ISLM using mcp;

result2("consum")=c.l;
result2("income")=y.l;
result2("intrest")=r.l;
result2("imports")=m.l;
result2("taxrev")=T.l;
result2("invest")=T.l;
result2("trade-gap")=tb.l;
result2("budget-gap")=bd.l;
result2("sav-invgap")=bd.l;
result2("exrate")=er.l;

*expansionary monetary and fiscal policies
G = 200;
t1=0.2;
mp =300;

solve ISLM using mcp;

result3("consum")=c.l;
result3("income")=y.l;
result3("intrest")=r.l;
result3("imports")=m.l;
result3("taxrev")=T.l;
result3("invest")=T.l;
result3("trade-gap")=tb.l;
result3("budget-gap")=bd.l;
result3("sav-invgap")=bd.l;
result3("exrate")=er.l;

display result, result1, result2, result3;


*declaration of flexible price model


model ISLMfl /ec,et, ei, em,ex,ey,emm,etb, ebd,esi,err, eprice/;

solve islmfl using mcp;
result4("consum")=c.l;
result4("income")=y.l;
result4("intrest")=r.l;
result4("imports")=m.l;
result4("taxrev")=T.l;
result4("invest")=T.l;
result4("trade-gap")=tb.l;
result4("budget-gap")=bd.l;
result4("sav-invgap")=bd.l;
result4("exrate")=er.l;
result4("pricelevel")=p.l;

display result, result1, result2, result3, result4;

$ontext
----    223 PARAMETER RESULT        basic solution

consum      742.797,    income     1033.898,    intrest       1.780,    imports      85.487,    taxrev      310.169
invest      310.169,    trade-gap   150.000,    budget-gap  210.169,    s-invgap    -60.169,    exrate        4.710

----    223 PARAMETER RESULT1       expansionary fiscal policy

consum     1222.802,    income     1604.396,    intrest       3.681,    imports     156.799,    taxrev      240.659
invest      240.659,    trade-gap   150.000,    budget-gap   40.659,    exrate        6.136,    sav-invgap   40.659

----    223 PARAMETER RESULT2       expansionary monetary policy

consum      956.000,    income     1260.000,    intrest      -0.800,    imports     113.750,    taxrev      252.000
invest      252.000,    trade-gap   150.000,    budget-gap  152.000,    exrate        5.275,    sav-invgap  152.000

----    223 PARAMETER RESULT3       expansionary fiscal and monetary policies

consum     1100.000,    income     1500.000,    imports     143.750,    taxrev      300.000,    invest      300.000
trade-gap   150.000,    budget-gap  100.000,    exrate        5.875,    sav-invgap  100.000

----    223 PARAMETER RESULT4       flexible price model

consum     1100.000,    income     1500.000,    imports     143.750,    taxrev      300.000,    invest      300.000
trade-gap   150.000,    budget-gap  100.000,    exrate        5.875,    sav-invgap  100.000,    pricelevel    1.000
$offtext