Short term fluctuations in Scottish output, employment and unemployment

This is an interim working paper on the development of a an econometric model of the short-term fluctuations in output, employment and unemployment in the Scottish economy. As is argued by many previous regional modellers and analysts, it is of both theoretical and practical importance to have an in-depth understanding of the regional economic problems and adjustment mechanisms. This is particularly needed at a time when the European nations are moving towards an economic and monetary union, as the importance of 'regional' issues will increase with 'regional' adjustment mechanisms replacing nominal exchange rate mechanism. A major advantage of this model is that it is the first quarterly model of the Scottish economy. A quarterly version of the model adds more
power and flexibility than an annual model. With a quarterly model we can not only explore richer lag structures and dynamic processes, but also carry out more
routine statistical tests against a variety of null hypotheses. A quarterly model can also provide timely forecasts. Another difference is that in the present model
the employment equation is derived from a maximization problem rather than an ad hoc specification. In the following section we give a detailed account of the
structure and specification of the model.