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How econometric models help policy makers; Theory and practice

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Author Info
Henk Don
Abstract

Frisch and Tinbergen founded the standard framework for finding the optimal economic policy by maximizing the welfare function under constraints supplied by the econometric model. Frisch worried about the reliability of the model and Tinbergen thought that it would be too difficult to specify the welfare function.

Looking at current practice in Dutch policy making, both worries are relevant but the solutions proposed by the founders are not very helpful. Rather, the solution is found in applying an iterative trial-and-error procedure interfacing between the policy maker and the model-cum-expert system.

The main contributions of the standard framework are its useful set of concepts, the famous order condition for a feasible solution, and the clear definition of role models for the two parties in the interaction.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Papers with number 27.

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Handle: RePEc:cpb:discus:27

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Related research
Keywords: macroeconomic models; macro-economic models; policy choice; policy vigour; reliability; uncertainty; welfare function;

Find related papers by JEL classification:
C0 - Mathematical and Quantitative Methods - - General
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Henk Don, F. J., 1983. "Uncertainty and the vigour of policy : A stronger result," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 187-191, September. [Downloadable!] (restricted)
  2. Bray, Jeremy, et al, 1995. "The Interfaces between Policy Makers, Markets and Modellers in the Design of Economic Policy: An Intermodel Comparison," Economic Journal, Royal Economic Society, vol. 105(431), pages 989-1000, July. [Downloadable!] (restricted)
  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
  4. Wallis, Kenneth F, 1993. "On Macroeconomic Policy and Macroeconometric Models," The Economic Record, The Economic Society of Australia, vol. 69(205), pages 113-30, June.
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  5. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2002-2), pages 1-62. [Downloadable!]
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  1. Streicher, Gerhard & Schmid, Erwin & Salhofer, Klaus, 2006. "Testing for the Efficiency of a Policy Intended to Meet Objectives: General Model and Application," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(02), August. [Downloadable!]
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