Some Recent Developments in Policy Making with Macroeconometric Models

Abstract

In many areas of economics competing models coexist, and the decision maker is typically given little guidance on how to choose between them. Many countries have competing macroeconometric models of their national economies. This paper describes some recent developments in policy making with macroeconometric models, drawing on the research programme of the ESRC Macroeconomic Modelling Bureau. This unique project was established to improve the accessibility of models of the UK economy and to undertake comparative research which improves understanding of the reasons for differences between them and, where possible, resolves those differences. The paper first reviews the techniques employed in model-based policy analysis. Next, the issues that arise in designing and implementing model comparison exercises based on their use are considered. Finally, a recent development in the structure of the models, namely the incorporation of expectations variables treated in a rational or model-consistent manner, is described. This is an important challenge to conventional policy analysis, because the analogy between economic and engineering systems on which it rests no longer holds. A pervasive theme is that model-based policy analysis should be fully documented and entirely open. When differences between models cannot be resolved, the reasons for their existence should be made completely transparent.