Consistent Simulations and the National Institute Model 8

Extract

This paper will present a set of simulation exercises, and discuss some of the methodological issues arising from the new National Institute Model 8. This model has been developed from earlier models used at the National Institute and has much in common with those models. In particular, it adheres to a traditional income-expenditure framework and is, in broad outline, a Keynesian model. The new feature of Model 8 which distinguishes it from its predecessors is the explicit widespread treatment of expectations. Recognition of the importance of expectations in macroeconomics is widely disseminated and much attention has been given recently in the econometric literature to the modelling of expectations. Model 8 now includes explicit expectations terms in the following sectors: employment, stockbuilding, investment, wage formation, the exchange rate and the demand for money. The details of individual equation estimation and specification may be found in Hall and Henry (1985a) and will not be given here. In the estimation process much use has been made of the rational expectations hypothesis, while in the full model implementation expectations may be formed either consistently or on the basis of explicit expectations models.