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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.

Suggested Citation

  • McKibbin, Warwick J & Vines, David, 2000. "Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 106-137, Winter.
  • Handle: RePEc:oup:oxford:v:16:y:2000:i:4:p:106-37
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    Cited by:

    1. 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.
    2. Warwick J. McKibbin & Andrew Stoeckel, 2009. "Modelling the global financial crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 581-607, Winter.
    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 J. McKibbin & Wing Thye Woo, 2003. "The Consequences of China's WTO Accession for Its Neighbors," Asian Economic Papers, MIT Press, vol. 2(2), pages 1-38.
    5. 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.
    6. Warwick J. McKibbin & Andrew B. Stoeckel & YingYing Lu, 2014. "Global Fiscal Adjustment and Trade Rebalancing," The World Economy, Wiley Blackwell, vol. 37(7), pages 892-922, July.
    7. 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.
    8. 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.
    9. McKibbin, Warwick J. & Tan, Kang Yong, 2009. "Learning and international transmission of shocks," Economic Modelling, Elsevier, vol. 26(5), pages 1033-1052, September.
    10. Jong-Wha Lee & Warwick J. McKibbin, 2014. "Service Sector Productivity and Economic Growth in Asia," Trade Working Papers 24361, East Asian Bureau of Economic Research.
    11. 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.
    12. Sujit Kapadia, 2003. "The Capital Stock and Equilibrium Unemployment: A New Theoretical Perspective," Economics Series Working Papers 181, University of Oxford, Department of Economics.
    13. Goyal, Ashima, 2002. "Coordinating monetary and fiscal policies: a role for rules?," MPRA Paper 29200, University Library of Munich, Germany.
    14. Jong-Wha Lee & Warwick J. Mc Kibbin & Yung Chul Park, 2004. "Les déséquilibres transpacifiques vus d’Asie de l’Est," Revue d'Économie Financière, Programme National Persée, vol. 77(4), pages 81-109.
    15. Jorg Scheibe, 2003. "The Chinese Output Gap During the Reform Period 1978-2002," Economics Series Working Papers 179, University of Oxford, Department of Economics.
    16. Adam Cagliarini & Warwick McKibbin, 2010. "Global Relative Price Shocks: The Role of Macroeconomic Policies," RBA Annual Conference Volume,in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
    17. 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.
    18. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, Elsevier.
    19. 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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