The Use of the New Macroeconometrics for Policy Formulation

Could a credible plan to reduce the government budget deficit stimulate the economy in the short run? If so, what speed of deficit reduction is required? Should the central bank alter its responsiveness to the state of the economy because of a credible deficit-reduction plan? Should the path of deficit reduction be contingent on the future state of the economy? These particular questions-all of which involve expectations and contingency rules for policy-are currently on the minds of policymakers in the United States, but similar questions have arisen in the past and are likely to arise again in the future. One of the trends in macroeconomics during the past decade is the development of a new type of macroeconometric model and policy-evaluation technique to answer these kinds of policy questions. In an important sense, these models and techniques together constitute a new type of macroeconometrics that can provide a workable alternative to the traditional Keynesian econometric models which have dominated practical policy analysis for the past 30 years. The new macroeconometrics is an outgrowth of what is sometimes referred to as the "rational-expectations revolution" of the 1970's as represented, for example, in the collection of papers in Robert E. Lucas, Jr., and Thomas J. Sargent (1981). Were it not for the Lucas critique, for the research showing that rational expectations do not imply that policy is ineffective, for the timeinconsistency rationale for rules rather than