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Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making

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  • McKibbin, Warwick J
  • Vines, David

Abstract

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 that 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). Copyright 2000 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 16 (2000)
Issue (Month): 4 (Winter)
Pages: 106-37

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Handle: RePEc:oup:oxford:v:16:y:2000:i:4:p:106-37

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Web page: http://oxrep.oupjournals.org/

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Cited by:
  1. Warwick J. McKibbin & David Vines, 2003. "Changes in Equity Risk Perceptions: Global Consequences and Policy Responses," Departmental Working Papers 2003-15, The Australian National University, Arndt-Corden Department of Economics.
  2. Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
  3. Satish Chand, 2001. "How misaligned is the Australian real exchange rate?," International and Development Economics Working Papers idec01-2, International and Development Economics.
  4. Warwick McKibbin & Andrew B Stoeckel & YingYing Lu, 2012. "Global Fiscal Adjustment and Trade Rebalancing," CAMA Working Papers 2012-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Matthieu Bussiere & Georgios Chortareas & Rebecca Driver, 2003. "Current Accounts, Net Foreign Assets and the Implications of Cyclical Factors," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 269-286, Spring.
  6. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, Elsevier.
  7. Tim Callen & Warwick J. McKibbin, 2001. "Policies and Prospects in Japan and the Implications for the Asia-Pacific Region," IMF Working Papers 01/131, International Monetary Fund.
  8. Adam Cagliarini & Warwick McKibbin, 2009. "Global Relative Price Shocks: The Role of Macroeconomic Policies," RBA Research Discussion Papers rdp2009-10, Reserve Bank of Australia.
  9. Dalton, Michael & O'Neill, Brian & Prskawetz, Alexia & Jiang, Leiwen & Pitkin, John, 2008. "Population aging and future carbon emissions in the United States," Energy Economics, Elsevier, vol. 30(2), pages 642-675, March.
  10. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
  11. Warwick J. McKibbin & Kang Yong Tan, 2006. "Learning And International Transmission Shocks," CAMA Working Papers 2007-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  12. Yung Chul Park & Warwick J. Mc Kibbin & Jong-Wha Lee, 2004. "Les déséquilibres transpacifiques vus d’Asie de l’Est," Revue d'Économie Financière, Programme National Persée, vol. 77(4), pages 81-109.
  13. Sujit Kapadia, 2003. "The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective," Economics Series Working Papers 181, University of Oxford, Department of Economics.
  14. Warwick J. McKibbin & Wing Thye Woo, 2003. "The Consequences of China's WTO Accession on its Neighbors," Departmental Working Papers 2003-17, The Australian National University, Arndt-Corden Department of Economics.
  15. Philip Lowe & Warwick McKibbin, 2003. "Discussion of 'Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?' and 'What the FOMC Says and Does When the Stock Market Booms'," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  16. Jorg Scheibe, 2003. "The Chinese Output Gap During the Reform Period 1978-2002," Economics Series Working Papers 179, University of Oxford, Department of Economics.
  17. Tim Callen & Warwick J. McKibbin & Nicoletta Batini, 2006. "The Global Impact of Demographic Change," IMF Working Papers 06/9, International Monetary Fund.

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