Decisions in Designing an Australian Macroeconomic Model

Abstract

This paper discusses the decisions made in designing a new Australian macroeconometric model to be used for both policy analysis and forecasting. Serving these dual functions requires a reasonable level of consistency with both macroeconomic theory (emphasised in New Keynesian dynamic stochastic general equilibrium models) and macroeconomic data (emphasised in vector autoregression models). The key decisions made in modelling household, business, government and foreign behaviour are explained. The design decisions taken are reflected in the new model, which is the latest in a series developed by the author. The use of the latest model is illustrated in optimal control simulations.