LINK
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LINK is a project started in 1968 by Wharton Econometric Forecasting Associates or WEFA, (now Global Insight), to build the world's first global macroeconomic model, linking models of many of the world's countries so that the effect of changes in the economy of one country are reflected in other countries.
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[edit] General information
The project was initiated in 1968 under the auspices of the U.S. Social Science Research Council and the leadership of Nobel Laureate Lawrence Klein and was mentioned in his citation for the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1980. Since then, Project LINK has expanded from a core of 11 researchers and seven country models to 79 models at the present time for a comprehensive coverage of the global economy.
This large cooperative, non governmental, international research consortium is based on a world wide network of participants in more than 60 countries, and it is internationally recognized as a leading center of quantitative international economic analysis. The activities of Project LINK are coordinated jointly by the Department of Economic and Social Affairs of the United Nations and the Project LINK Research Center at the University of Toronto.
Project LINK's principal achievement has been to integrate independently developed national models into one world model (LINK). The national centers of the project include universities, private research organizations, government agencies, and central banks.
The operational center of the project has been at United Nations Headquarters in New York since 1989, when it was transferred here from the University of Pennsylvania. The center maintains and updates computerized files and the LINK data bases, model equations and computer programs with documentation. It prepares medium term baseline forecasts as well as alternative scenarios with the model. The U.N. center also assists national modeling centers by periodically providing global LINK forecasts of world variables and in undertaking scenario analyses.
The most important feature of Project LINK is its reliance on the expertise in modeling and economic analysis of resident economists from all OECD countries, more than forty individual developing countries, and almost all the economies in transition. Most of these groups operate national econometric models which are part of the LINK system.
In addition to its regular concern with issues related to the short and medium term prospects of the international economy, Project LINK is a focal point for applied international economic research in general. Its meetings and research projects draw on an extensive network of international economic experts, both from inside and outside the modeling community. The economic analyses prepared by the group are used regularly by national policy makers, international economic agencies and private research organizations.
The objectives of the project are the following:
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- To provide a consistent framework for undertaking quantitative studies of the international economic transmission mechanisms and the effects of international disturbances, of international policies and development projects on the outlook for the world economy;
- To improve the understanding of global economic interdependence, and the determinants of the economic performance of individual industrial, newly industrializing, and developed and developing countries;
- To assist project participants, international agencies, and outside international economic research centers in improving macroeconomic policy formulation, implementation, and evaluation through the use of quantitative techniques which take into account global economic interdependence;
- To evaluate the global economic implications of national and international economic policy initiatives, and structural reforms within a globally consistent framework;
- To advance academic research in the areas of international economics, development economics and related areas. In addition, econometric methods and large scale model solution techniques are being investigated by member teams.
There are two LINK meetings each year, one is in spring and another is in fall, to discuss the outlook of the world economy and some special issue, and to evaluate the project work in progress.
[edit] How LINK forecasts are generated
The LINK model resides on the computers at United Nations Headquarters and at the University of Toronto. The modeling system consists of 79 models, representing 72 individual economies and 7 regional groupings (most are small developing economies for which individual models have not yet been integrated). These models are diverse in scale and scope, ranging from small-scale models of a few dozen equations to national systems of several thousand equations. The international transmission between national and regional economies is modeled in various sub-modules, which deal with merchandise trade flows and trade prices, service trade, exchange rates, and international commodity markets. In total, the LINK system consists of 30,000 variables.
Most national models in the LINK system can be described as traditional open-economy macroeconomic models. While economic activity is generally demand-driven, supply-side constraints are incorporated in some of the models. The representation of factor demands and prices follows standard economic theory, with proper allowance for national peculiarities. As most of the models are built and maintained by resident national experts, structural country-specific details, such as the transmission of monetary and fiscal policies and institutional detail in both the public and the private sector, are well captured.
The most important international linkage operates through the modeling of trade flows and trade prices. LINK applies the concept of a trade matrix, i.e. the bilateral trade shares, disaggregated by a number of commodities. In this framework, a country's exports are a weighted average of partner countries' imports, with the weights given by the appropriate trade shares. Similarly, a country's import prices are derived from partner countries' export prices. As trade shares sum to unity, this approach imposes consistency on international trade flows. A similar approach is currently being developed for international service flows.
International monetary linkages are primarily provided through an exchange rate module. Major currency exchange rates are modeled endogenously as functions of interest and inflation differentials and cumulated wealth positions. The scarcity of international financial data prevents a consistent modeling of bilateral capital flows at the present time.
Important world-wide commodity markets, such as oil, raw materials, etc., are being analyzed in separate sub modules, and these sub-modules will provide price forecasts that can be fed into producer and consumer countries.
Before each LINK meeting, national LINK participants will send to the Center the forecasts of their own economy, including their major policy and exogenous assumptions. The LINK Center is responsible for the international consistency in terms of the following aspects: major currency exchange rates--which should be consistent to the monetary policy assumptions in the major countries; commodity prices and their implied export and import deflators for the corresponding trade categories across countries; and international trade equilibrium as imposed by the transmission mechanisms.
With several iterations of computer simulation and human interaction, a Pre-Meeting LINK forecast for the world economy can be generated, including outlook for world, regional and country economic activities. This Pre-Meeting forecast will be presented to the LINK Expert Group meeting as the baseline. Since the impose of international consistency could make the forecasts for some countries different from their original single country forecasts, comments and feedbacks from the national experts will be collected in the LINK meeting and a Post-Meeting LINK forecast will be generated after the meeting.
LINK forecasting, to some extent, is a process, a dynamic interaction among the economists involved in the Project.
