The effects of long-run changes in the relationship of capital to labour are not explained.
FINANCIAL SECTOR
The stochastic equations for the financial sector consist of an equation explaining member bank borrowing from the Federal Reserve (22), two term structure equations (23, 24), an equation explaining the change in stock prices (25), and a demand for currency equation (26).
THE BANK BORROWING EQUATION
The ratio of borrowed reserves to total reserves is assumed to be a function of the difference between the three-month Treasury bill rate and the discount rate. This equation does not fit very well, and the estimate of the serial correlation coefficient is fairly high. There is, however, at least some slight evidence that bank borrowing responds to the interest rate differential.
THE TWO TERM STRUCTURE EQUATIONS
The expectations theory of the term structure of interest rates states that long-term rates are a function of the current and expected future short-term rates. The two long-term interest rates in the model are the bond rate and the mortgage rate. These rates are assumed to be determined according to the expectations theory, where current and past values of the short-term interest rate are used as proxies for expected future values.
CAPITAL GAINS
The capital gains variable is the change in the market values of stocks held by the household sector. In the theoretical model the aggregate value of stocks is determined as the present discounted value of expected future after-tax cash flow, the discount rates being the current and expected future short-term interest rates. The theoretical model thus implies that capital gains should be a function of changes in expected future after-tax cash flow and of changes in current and expected future interest rates. In the empirical work the change in the bond rate was used as a proxy for changes in expected future interest rates, and the current and one-quarter-lagged values of the change in after-tax cash flow were used as proxies for changes in expected future after-tax cash flow.
DEMAND FOR CURRENCY
This equation states that the real per-capita demand for currency is a function of the real per-capita level of sales and of the after-tax short-term interest rate. A time trend is also included in the equation, although it is not significant.

FOREIGN SECTOR
There is one estimated equation (27) for the foreign sector, an equation explaining the demand for imports. Since this demand is demand by domestic sectors, the position of the equation is somewhat arbitrary. It was put here to highlight the fact that the demand for imports has an important effect on the savings of the foreign sector.

STATE AND LOCAL GOVERNMENT SECTOR
There is only one stochastic equation (28) for the state and local government sector. It explains unemployment insurance benefits as a function of the level of unemployment and of the nominal wage rate.