Macro-models and the medium term – The NIESR experience with NiGEM

Pub. Date
30 June, 2001

Large scale macro-econometric models have been changing over the last two decades,

and they have been increasingly designed to investigate medium term problems

associated with the determinants of growth and the design of policy regimes. Macromodels

were constructed for forecasting purposes, and many forecasters have begun

to realise that knowing both the medium term prospects for the economy and the

structure of the underlying equilibrium helps improve contributions to the

conjunctural debate. Many models are now firmly grounded in economic theory, with

strong New-Keynesian influences being the most common. The underlying structure

determines the level of output and the trajectory for prices, with equilibrium

correction mechanisms pulling the economy toward its long run, albeit slowly. This

paper looks at the National Institute global model, NiGEM, a rational expectations

New Keynesian model with a strong basis in estimation. The model has been widely

used in forecasting and policy analysis, and is being continually developed. Much

recent research has gone into improving the supply side of the model. The underlying

level and growth of output determine capacity and capacity utilisation, and hence

impinges on both forecasts and the use of the model for policy analysis. Wellspecified

models are homogenous in prices and allow economists to investigate the

determination of the price level and of relative prices. Models need to answer question

such as what are the implications of the fall in the euro against the dollar, and this is

discussed in order to throw light on the properties of the models. The issues of

forward-looking consumption and dynamic properties are addressed, as they form a

part of the ongoing agenda of research.