The Aggregate Production Function in the Treasury Macroeconomic (TRYM) Model

The TRYM model is a dynamic general equilibrium model of the Australian economy that is maintained by the Australian Treasury. It is used by Treasury as one input into the process of policy analysis and economic forecasting. As part of ongoing review of the model, we have been examining the appropriate specification of the production function and the suitability of an aggregate production function. We have been particularly concerned with possible problems arising from various changes in the economy, including: Changes in industry ownership (privatisation) and the relative sizes of industry sectors; Changes in the composition of investment; Changes in product markets and labour markets due to market reforms and rising import-penetration ratios; Evidence that the rate of technical progress has varied over time; Evidence that historical movements of real wages are significantly outside of the scope of the production function. This paper reports on some ongoing developments to TRYM and results from investigation into these issues.