Econometric versus quasiempirical models: Macroeconomic policy analysis in the Netherlands

Abstract

The Netherlands has a long standing tradition with respect to the use of macroeconometric models for policy analysis. Next to these models, quasiempirical models, which are relatively small and calibrated models, also play a certain role in the policy making process. The present article evaluates the pros and cons of using quasiempirical models for actual policy analysis. A recent model of this type is analysed and compared with the empirical policy model of the Dutch central bank, MORKMON, as a representative of the modern generation of Dutch macroeconometric models. Some important features of this quasiempirical model are wage rigidity, downward price rigidity, flexible exchange rates, imperfect substitution between both various domestic assets and foreign assets, a Tobin's q type of monetary transmission, and exogenous expectations with respect to inflation and the exchange rate. The model stresses the importance of profitability for economic growth.