Comparative Properties of Models of the UK Economy
Church, Keith B., Sault, Joanne E., Sgherri, Silvia, Wallis, Kenneth F., National Institute Economic Review
Kenneth F. Wallis [*]
This article analyses the properties of five leading macroeconometric models of the UK economy, as revealed in four simulation experiments. These are carried out in a common operating environment that reflects the broad objectives of current policy -- sound public finances and low inflation -- by using feedback rules for income tax and interest rates. Developments in the structure of the models as revealed by the series of such exercises carried out during the lifetime of the ESRC Macroeconomic Modelling Bureau (1983-99) are described. The development of the research methods through which models' properties were elucidated and analysed is also reviewed.
Comparative analysis of macroeconometric models took a significant step forward in 1983 with the establishment of the ESRC Macroeconomic Modelling Bureau. This was an important initiative by the Macroeconomic Modelling Consortium, itself newly established to coordinate support for a programme of research in macroeconomic modelling provided by the Research Council, HM Treasury and the Bank of England, and to manage this on a four-year cycle. Both developments resulted from the acceptance in June 1981 by the then Social Science Research Council of the recommendations of a subcommittee on macroeconomic research chaired by Michael Posner (SSRC, 1981). In the course of its deliberations the subcommittee had considered the case for setting up a new centre, to undertake comparative research on existing models of the UK economy and to help achieve greater openness and understanding of the models and their associated forecasts and policy analysis. It was supported in this by the House of Commons Select Committee on th e Treasury and Civil Service which, in the course of its enquiry into monetary policy, was "not satisfied that present arrangements produce the most useful model-based evidence for the Committee, for Parliament, or for the public" (Treasury and Civil Service Committee, Session 1980-81, Ch.1O). The Bureau was funded by the Consortium in each of its four four-year phases, until the research programme was discontinued in 1999, and the Bureau closed on 30 September 1999.
Regular comparative studies of overall model properties gave a first look at dynamic multipliers and policy ready-reckoners, and the reasons for differences between them across different models. These studies initially appeared as chapters in annual review volumes (Wallis et al., 1984-87) and subsequently as articles in this Review, at first annually and then biennially; the last exercise in this sequence appears in the fourth section of the present article. These accounts of overall model properties, based on standard simulation experiments, met the initial demand for information about the models and the reasons for differences between them, and also focussed Bureau research on specific features of the models that might be responsible for these differences. How these research methods developed is briefly reviewed in the following section.
Macroeconomic models evolve, in response to developments in economic theory and econometric methods, new statistical evidence, changes in legislative and institutional arrangements and changes in the economic policy questions asked of the models. A look back over the Bureau's regular comparative studies gives a clear view of this development process, and three major elements are described in the third section. The models are now better grounded in economic theory, have firmer econometric foundations, and are better suited to the analysis of the current monetary and fiscal policy environment than was the case sixteen years ago.
The general properties of the current versions of five models of the UK economy are analysed in the fourth section. One is the model of HM Treasury, while four received support from the Consortium. Two of these modelling groups, namely those at the London Business School (LBS) and the National Institute of Economic and Social Research (NIESR) were, like the Bureau, supported in all four phases of the Consortium's research programme, while the 'COMPACT' model group led by Simon Wren-Lewis of the University of Exeter and the Cambridge University Small UK Model (CUSUM), directed by Sean Holly, appeared in the later phases of the programme. …