Economic Policy Formulation in a Large-scale Model

Methods of controlling econometric models have been developed mainly for small-scale linear models, usually for the purpose of demonstrating the power and potential application of control techniques. In the practice of economic management, however, the models used are often very large and nearly always nonlinear. This paper presents a method of formulating dynamic policies in a large-scale model, basically by adapting Tinbergen’s targets-instruments approach (1963, 1966). The method is not intended to produce an optimal solution but rather a series of alternative solutions or strategies for economic policy, with different combinations of targets and instruments. The intention is to narrow down the feasible and sensible range of policies which are worth thorough and detailed exploration. The method is illustrated by an application to the Cambridge Growth Project’s multisectoral dynamic model of the UK economy.