Journal Article

Modelling reality

W McKibbin and D Vines

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 16, issue 4, pages 106-137
Published in print December 2000 | ISSN: 0266-903X
Published online December 2000 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/16.4.106
Modelling reality

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There is a thriving debate on the usefulness of economic models for policy analysis which this paper explores. It argues that there is a need for models that incorporate both the modern intertemporal approach to macroeconomics and short-run ad-hoc behaviour. This need cannot be met by the simple models that permeate the macroeconomics literature, but requires large-scale simulation models such as the MSG2 and G-Cubed multi-country models. In particular, it is shown that the approach of these models gives insights into the adjustment into a number of historical episodes which are not well explained by simple macroeconomic frameworks: Reaganomics in the 1980s; German reunification in the early 1990s; fiscal consolidation in Europe in the 1990s; the formation of NAFTA; the Asian Crisis; and the current productivity boom in the USA. The paper also argues that using a well-defined theoretical specification but introducing real-world rigidities can also go some way towards explaining the so called 'six major puzzles in international macroeconomics' highlighted in a recent paper by Obstfeld and Rogoff (2000).

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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