DP526 The Measurement of Policy Effects in a Non-Causal Model: An Application to Economic Policy in the UK, 1974-79

Author(s):	Michael J Artis, Robin Bladen-Hovell, Yue Ma
Publication Date:	April 1991
Keyword(s):	Economic Policy, Expectations, Simulation
JEL(s):	041, 212, 311, 312
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=526

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.