A READY RECKONER PACKAGE FOR MACROECONOMICS TEACHING‡
| Author | David Turner,Garry Macdonald |
| DOI | http://doi.org/10.1111/j.1468-0084.1989.mp51002005.x |
| Date | 01 May 1989 |
| Published date | 01 May 1989 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 51,2(1989)
0305-9049 $3.00
A READY RECKONER PACKAGE FOR
MACROECONOMICS TEACFIING1
Garry Macdonald and David Turner
I. INTRODUCTION
In the teaching of macroeconomics the quantitative aspects of the policy
debate are often neglected. Students may be able to derive algebraic expres-
sions for such quantities as the government expenditure multiplier and to
obtain inequalities relating it to the tax cut multiplier, but they often have little
idea of the magnitude of the likely effects on GDP of, say, cutting income tax
by two pence, or increasing government expenditure by some equivalent
amount. More generally, the possible effects of a reflationary package aimed
at reducing unemployment such as those advocated by the opposition parties
at the last General Election, may be discussed in broad terms, but typically
cannot be quantified in terms of the likely cost on the PSBR, current account,
inflation and so on. This paper presents a computer package, based on two
large-scale macroeconomic models, that allows issues such as these to be
addressed in the classroom.
In Section II we describe the major macroeconometric models of the UK
economy and consider the problems in using these models for policy analysis
as well as for teaching purposes. In Section III we explain the concept of a
'Ready Reckoner'. These ready reckoners form the basis of a simple-to-use
PC based FORTRAN program written by the present authors which
calculates the effect on a number of key macroeconomic indicators of a
policy package devised by the user (see Appendix for details on the availabil-
ity of the program). In Section IV we illustrate the use of this Ready Reckoner
program by evaluating a policy package, aimed at substantially reducing
unemployment, recently advocated by the Employment Institute. In Section
V conclusions are drawn.
II. CURRENT UK MACROECONOMIC MODELS
The leading models of the UK economy are the quarterly models of the
Treasury, London Business School (LBS), National Institute of Economic
We would like to thank Paul Fisher, Chris Milner, Alan Sutherland, John Whitley, Ken
Wallis and Tony Westaway for comments on an earlier version of this paper.
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and Social Research (NIESR) and the Bank of England, and the annual
models of the City University Business School (CUBS), Liverpool Research
Group in Macroeconomics and the Cambridge Growth Project (CGP). These
models are used by the groups who build and maintain them to provide
regular forecasts. Since September 1983 versions of these models have been
deposited in one central location at the University of Warwick, where the
ESRC has established the Macroeconomic Modelling Bureau. The Bureau's
task is to provide academic users with access to the models, and to undertake
comparative research.
Just as there is no consensus view of the economy amongst economists, so
too do the structure and properties of the models differ, with each model
reflecting, to some extent, the broad views and philosophies of the model-
builders. The four quarterly models are built around a Keynesian income-
expenditure framework, whereas the Liverpool model is described as a 'New
Classical' model, the CUBS model emphasizes supply-side factors in the
determination of output and the CGP model is a highly disaggregated Leon-
tief input-output model embedded within a conventional income-expenditure
framework. However even those models which have a similar structure may
well have very different overall properties due to important variations in the
specification of parameter estimates of key equations, such as those deter--
mining wages or the exchange rate. Thus a diversity of model-based results
simply reflects different views of how the economy operates, although clearly
conclusions of model-based policy may be more robust if they hold across a
range of models. In the remainder of this section we consider some of the
problems in using macroeconomic models for policy analysis and for teach-
ing purposes.
A major criticism of the use of macroeconomic models for policy analysis
is that the structure of models will not be invariant to the policy being con-
sidered once allowance is made for the influence of agents' expectations
about policy - the so-called 'Lucas critique'. Thus it is argued that it becomes
logically invalid to use a model estimated under one policy regime to evaluate
the effects of a policy change. While a full consideration of this issue is
beyond the scope of this paper, in practice we do not tend to observe the
wholesale and frequent breakdown of a range of econometric relationships
(as might be implied if the Lucas critique was taken to an extreme). Further-
more the introduction of rational expectations (currently incorporated in the
NIESR, LBS and Liverpool models) can be seen as one means of explicitly
addressing the Lucas critique - by ensuring that agents' expectations are
consistent with the forecasts of the models involved - so that if a policy
change is simulated then agents' expectations are consistent with the new
forecast values implied. Finally it might reasonably be argued that while
macro models may give plausible results in analysing policy changes which
are within the realms of historical experience (for example cutting the rate of
income tax by two pence) models become much less reliable, and indeed
more subject to the Lucas critique, when used to analyse policy proposals on
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