Working Paper: CEPR ID: DP526
Authors: M. J. Artis; R. Bladenhovel; Y. Ma
Abstract: There is a well-established methodology for measuring the effects of economic policy in a model that is `causal' or backward-looking. In this paper a complementary methodology is described for the case in which the model is `non-causal' or forward-looking. The methodology is then applied to an econometric model of the British economy, the National Institute model version 11; in this version expectational variables appear in several key equations (both for quantities and for prices) and the model may be solved in forward-looking or in backward-looking mode. The policy period for which the exercise is conducted is 1974-9, the term of office of the last Labour administrations (under the premierships of Wilson and Callaghan), and a period of considerable economic stress. The results obtained for the effects of policy when the model is solved in forward-looking mode are compared with those obtained when expectations are assumed to be formed adaptively.
Keywords: economic policy; expectations; simulation
JEL Codes: 041; 212; 311; 312
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Output (Y10) |
| Anticipated fiscal policy effects (E62) | Output (Y10) |
| Unanticipated fiscal policy effects (E62) | Output (Y10) |
| Fiscal policy (E62) | Inflation (E31) |
| Monetary policy (E52) | Inflation (E31) |
| Monetary policy (E52) | Exchange rate depreciation (F31) |
| Forward-looking expectations (D84) | GDP effects (F62) |
| Forward-looking expectations (D84) | Inflation response (E31) |
| Forward-looking expectations (D84) | Recovery from exchange crisis (F31) |