How Econometric Models help Policy Makers: Theory and Practice

Frisch and Tinbergen founded the standard framework for finding the optimal economic policy by maximizing the welfare function under constraints supplied by the econometric model. Frisch worried about the reliability of the model and Tinbergen thought that it would be too difficult to specify the welfare function. Looking at current practice in Dutch policy making, both worries are relevant but the solutions proposed by the founders are not very helpful. Rather, the solution is found in applying an iterative trial-and-error procedure interfacing between the policy maker and the model-cum-expert system. The main contributions of the standard framework are its useful set of concepts, the famous order condition for a feasible solution, and the clear definition of role models for the two parties in the interaction.     

Jelle Zilstra: A versatile economist

Summary In 1983 Dr. Jelle Zijlstra was a member of the board of editors ofDe Economist for 35 years. At the request of his co-editors, this article has been written to put in a clear light the person and work of Dr. Zijlstra. Zijlstra has been a professor of economics, a minister of economic affairs and of finance in several Dutch cabinets, and, from 1967–1981, President of the Netherlands Bank. During these activities he has made important contributions to economic theory and economic policy, both in legislative work and in various publications. In this article his valuable contributions in such different fields as economic competition, economic order, public finance, monetary theory and central banking policy are analyzed. The author comes to the conclusion that Dr. Zijlstra is an original thinker, who has been a stimulating and inspiring contributor to the different fields of economic theory and economic policy in which he has been active. The author thanks Professor P. Hennipman and Professor S. K. Kuipers for their valuable suggestions.     

The recent failure of U.S. monetary policy

Summary The very slow growth of the broad money supply has been a primary source of U.S. economic weakness in 1990 through 1992. The velocity link between M2 and the subsequent level of nominal GDP has not declined. But changes in bank reserves brought about by open market operations have had much less effect onM2 than the Fed anticipated for two reasons: (1) reserve requirements now apply to only a small fraction of totalM2; and (2) the new bank capital requirements limit some banks ability to lend. The Federal Reserve failed to appreciate the importance of these conditions and misjudged the strength of the monetary policy stimulus that it was providing.Professor of Economics, Harvard University, and President of the National Bureau of Economic Research.Sixth Tinbergen Lecture delivered on October 2, 1992, in The Hague for the Royal Netherlands Economic Association.     

Tinbergen's work: Change and continuity

Summary This article provides an overview of Tinbergen's economic writings, comprising well over 900 publications. Six broad areas have been distinguished to allow for the classification and discussion of Tinbergen's economic work. These six areas embody the change in Tinbergen's areas of interest apart from the shift from physics to economics early in his career. Tinbergen's work, however, is not only characterised by change of areas but also by continuity in approach. To mark this continuity four main characteristics of Tinbergen's work have been elaborated. The article concludes with Tinbergen's observations on the achievements to be expected from scientific research.J. Kol is Associate Professor of International Economics and Economic Integration at the Faculty of Economics of the Erasmus University in Rotterdam; P. de Wolff is Emeritus Professor at the University of Amsterdam and was Director of the Central Planning Bureau in The Hague as successor of J. Tinbergen. The authors are grateful to Mrs. I.M. Lageweg and Mr C.J. van Opijnen for their assistance with references.     

Simon Kuipers: An Economist in Search of Rigour and Relevance

At the end of 1997 and after twenty-five years of duty, Professor Simon Kuipers retired as managing editor of De Economist. As a token of indebtedness and gratitude, this article reviews Kuipers' written work. The article focuses on two topics that dominate Kuipers' endeavours. First, his contributions to macroeconomic theory, with particular emphasis on his (neo-)Keynesian approach are examined. Second, Kuipers' contributions to actual monetary and economic policy are discussed, emphasis being placed on his empirical work.     

Does the welfare state increase welfare? Reflections on hidden negatives and observed positives

Summary The growth of the welfare state and the taxes required to finance it has affected aggregate economic welfare through several channels. Some of the impacts are negative; others are positive. This paper appraises the evidence on the magnitude of a dozen of these impacts, and concludes that for both the Netherlands and the U.S., aggregate gains exceed the losses. At the margin, however, the comparison is not so favorable and a strategy is suggested whereby the welfare state could be reoriented so as to preserve the gains while reducing the losses. This strategy is an alternative to simple retrenchment of the welfare state.I acknowledge the helpful and insightful comments on, and discussions of, the issues addressed here by Professors Victor Halberstadt, Jan Pen, Barbara Wolfe, and Dirk Wolfson.Revised version of the Tinbergen Lecture, given March 28th at the Erasmus University, Rotterdam, The Netherlands.     

Demand and supply as factors determining economic growth

Summary In models of economic growth the long-run rate of growth is usually determined by exogenous factors like the increase in working population and technical progress. In this article the rate of technical progress is treated as an endogenous variable depending on the increase in real wages and the degree of capacity utilization. A clay-clay production model is presented. Moreover, consumption, investment, changes in wages and in prices are explained by additional equations. Numerical steady state solutions for different values of the parameters are discussed. In each case the specific role played by demand and supply is stressed.The authors are Professor of Economics and Assistant Professor of Economics, University of Tilburg, The Netherlands. They are indebted to Professor S. K. Kuipers for valuable comments on an earlier version of the article.     

A model of real and financial household behaviour

Summary This paper shows that the traditional specification of the consumption function in Dutch macroeconometric models is unsatisfactory. In the traditional approach the fact that the consumption decision is taken simultaneously with financial decisions has been ignored. If both the consumption function and the asset demand equations are modelled simultaneously, then in the Dutch case financial stocks have influence on private consumption. Also it has been shown that the income concept is important in describing household behaviour. In a current income model short-term financial considerations are important in the consumption decision. In a permanent income model long-term financial considerations influence private consumption.The author would like to thank Professor Th. van de Klundert, Professor S.K. Kuipers, Mr. G.H. Kuper and Dr. N.S. Kroonenberg for their comments on an earlier version of this paper.     

Jan Tinbergen's Income distribution: Analysis and policies

Summary This paper is a detailed review and critique of Jan Tinbergen'sIncome Distribution: Analysis and Policies. In Part I, the books primary findings and their bases are recounted. This presentation serves as the basis for a number of questions regarding the merits of the overall approach — in particular, the empirical methodology — and the reliability of the findings. These questions are posed in Part II. In Part III, an overall appraisal of the work is offered.North-Holland Publishing Co., Amsterdam, 1975.Professor of Economics and Fellow of the Institute for Research on Poverty, University of Wisconsin-Madison. This article was prepared while the author was a Fellow at the Netherlands Institute for Advanced Study. The work was supported in part by the Netherlands Institute for Advanced Study and by funds granted to the Institute for Research on Poverty at the University of Wisconsin-Madison by the U.S. Department of Health, Education and Welfare pursuant to the Economic Opportunity Act of 1964. Helpful comments on an earlier draft by Hans Daudt, Arthur Goldberger, Victor Halberstadt, Arnold Heertje, and Jan Pen are acknowledged. A discussion with Jan Tinbergen on issues raised in his volume was especially valuable, This review article appeared in a slightly different form in the Winter, 1975 issue of theJournal of Human Resources.     

Profitability and factor demands under uncertainty

Summary The medium term relationship between wages and employment very much concerned Jan Tinbergen in the 30's and is concerning us again today. Precisely analyzing the demands for labor and capital is a prerequisite for understanding this relationship. With this purpose two propositions are here scrutinized: the productive capacity that a firm chooses mainly depends on its expectations about future demand and on the profitability of production; the desired capital intensity mainly depends on the relative cost of capital with respect to labor. In the model uncertainty of future prospects and irreversibility of investment play the major roles.Second Tinbergen Lecture, delivered on October 8, 1988, in The Hague for the Royal Netherlands Economic Association.     

Recollections of My Career

Editorial Note:Professor Sumitro Djojohadilcusomo is one of the principal architects of Indonesia's post-independence economic policy. He has held key economic portfolios in both the immediate post-independence era and in the New Order. In addition, as Professor of Economics at the University of Indonesia, and as a tireless lecturer and writer on economic issues, he has been instrumental in shaping the education of several generations of economics students in Indonesia, many of whom are now in key government positions. At the end of August, Professor Sumitro generously agreed to be interviewed on his long career by two members of the BIES editorial board, Anne Booth and Thee Kian Wie. In preparing this interview for publication, the editors have tried to preserve Professor Sumilro's own words to the greatest extent possible; his lucid and entertaining remarks are thus reproduced with a minimum of editing. The interview began with a question to Professor Sumitro about his early training in economies.     

The distribution of income: Evidence,theories and policy

Summary This Tinbergen Lecture begins by reviewing empirical evidence about trends in income inequality in a number of Western countries. There is considerable diversity of experience across countries. The first quarter century after the Second World War was not generally characterised by a steady downward trend in inequality, but by episodes of inequality reduction at different dates. More recently, several OECD countries have seen a rise in inequality, but the rates of increase differed and in around half of the countries shown there was no significant upward trend over the 1980s. The differing experiences, and the episodic nature of changes, have implications for the explanations of inequality considered in Sections 2 and 3 of the Lecture. I begin with the mechanism which Tinbergen described in Chapter 6 of hisIncome Distribution: the race between technological development and education. It is argued that behind the supply and demand model there lie a variety of factors, and that the explanation we give may be important in determining whether what we are observing are wagedifferentials or wageinequality. Moreover, we need to consider non-labour income, and Section 3 examines the determination of state transfers and of capital income. Finally, in Section 4, I consider some of the policy implications, focusing on one particular set of policy proposals in which Jan Tinbergen was interested: the idea of a basic income.Ninth Tinbergen Lecture delivered on September 29, 1995 at De Nederlandsche Bank, Amsterdam for the Royal Netherlands Economic Association.     

Finlands economy during the period of the gold standard

Abstract

The fruitful co-operation between economic history and economics has grown in scope and strength. In his investigations the economic historian has increasingly applied the methods and viewpoints of economic research; and in the field of economics there has been a growing understanding of the significance of the help to be obtained from economic history in expanding the range of economic statistics and other data. Just as, for example, national income calculations and other economic statistics have to-day been brought up to approximately equal standards in the different countries, so there is now an interest in extending these calculations as far back into history as possible. It has already proved possible in Sweden to take fairly reliable national income calculations back to the 1860s, but in Finland the corresponding data have so far been available only from 1926. Consequently, Finnish economic studies have tended, with a few exceptions, to be restricted in time to analyses of the 1930s and the post-war era. This has provided a rather narrow basis for investigations of, for example, business cycles; it has meant in fact that only one complete cycle has been examined, together with various other trends in the economy which were in many ways made exceptional by the war. The statistical background of what is termed economic growth, to which increasing attention has also been paid of late in Finland, has seemed especially limited. There is thus considerable need in Finland to enlarge the range of economic statistics, and the publication of Professor Heimer Björkqvist's work must therefore be greeted with satisfaction. It illustrates many aspects of the development of Finland's economic life during the functioning of the gold standard mechanism from 1878 to 1918, and it contains much new statistical material for the period, e.g. a wholesale price index.     

Freia and Kompas,The Central Planning Bureau's new generation of macro-economic policy models: A review article

Summary On the eve of the 50th anniversary of macro-economic model building in the Netherlands, the Central Planning Bureau introduced two new models for policy analysis, the annual model FREIA and the quarterly model KOMPAS. The main novelty of these models as compared to their predecessors is a fully fledged submodel of the financial sector. This review article highlights some features of both models and compares their properties with those of other models and with results from the literature. The models have been explicitly constructed for practical use and therefore do not reflect any theoretical approach in particular.Critical comments on a previous version of this article by the Department's colleagues and a referee are gratefully acknowledged.     

Swedish economic history before the 1980s

Abstract

The early days of economic history in Sweden — the many scattered, more or less important, contributions of the 19th century — have never been investigated. Hans Forssell's remarkable work on the 16th century has won well-deserved fame, but his was not an isolated case. Around the turn of the century, interest in the subject area increased, in Sweden as elsewhere. There were a few dissertations, formally in economics or in history (for instance, Eli Heckscher's in 1907). The first assistant professor of economic history to be appointed was Karl Petander, in Stockhohn in 1912.     

An evaluation of the MORKMON Model

Summary MORKMON, De Nederlandsche Bank's new quarterly model of the Dutch economy fits in the last generation of macroeconometric models. Based on an integrated set of national and financial accounts, it combines demand, supply and financial conditions. Distinct features are a detailed financial sector, and endogenous exchange-rate determination. The specification reflects the model-builders inclination to give a great weight to empirical evidence. The model's forecasting performance is quite satisfactory, but not all simulations yield plausible results. In particular the interaction between the real and the financial sector could benefit from further research, for which MORKMON provides an excellent bridgehead.     

China＇s Economy in 2006/2007： Managing High Growth for Faster Structural Adjustment

China's economy in 2006 continued to register high growth of 10.5 to 10.7 percent with low inflation (CPI at 1.3 percent),dissipating fears of a hard landing. Since its accession to the WTO,China has become a significant global economic player,and is the favorite destination for many regional and global production networks. China is now a truly economic power (jingji daguo). China's economic leadership is also increasingly confident of its ability to manage China's domestic economic growth and its growing relations with the outside world. Although China's growth is expected to slow down in 2007 to approximately 9.5 percent,the national mood now is one of "more balanced" growth rather than "fast growth". Therefore,the building of a "harmonious society" is to be emphasized in China,while letting economic growth solve the burning social and environmental issues. In 2007,the government will also need to deal with various internal and external macroeconomic imbalances. The renminbi will be under even stronger pressure to revalue,given China's record trade surplus of US$160bn and foreign reserves of US$1tn.     

Reviews

Abstract

Professor Hugo E. Pipping's work on the vicissitudes of the Bank of Finland (the central bank of the country) is one of the weightiest contributions that has yet been made to Finnish economic history. With the completion of volume lIt he has brought the story up to the beginning of World War I.     

A demand and supply model of economic growth

Summary A demand and supply model of economic growth has been developed. By means of this model a number of characteristics of the growth process have been investigated. Special attention has been given to the causes and consequences of growth disequilibria and the determinants of income distribution.The analysis leads to the conclusion that three growth situations must be distinguished: output is restricted by effective demand, by effective supply, and by the size of the labour force. The causes of growth disequilibria and the determinants of income distribution differ in each of these three cases. In this respect the model is more general than traditional post-keynesian, neo-keynesian and neo-classical growth models.The author is indebted to Professor Frits J. de Jong for his non-desisting support during the preparation of this paper. He is grateful to Mrs. Gerda H. de Jong of Veendam, The Netherlands, and to Dr. James H. Gapinski, Assistant Professor, Florida State University, Tallahassee, Florida for kindly improving the English of this article.In many respects this article draws heavily upon my doctoral dissertation:De betekenis van vraag- en aanbodfactoren in groeimodellen met één sector, mimeographed, Groningen, 1970.     

Naar De Meetbaarheid Van Een Rechtvaardige Verdeling

Summary The author proposes a method to arrive at a cardinal theory of utility or welfare (considered identical) by the introduction into the utility function of (1) variables, (2) parameters and (3) coefficients. Parameters characterize measured differences between individuals relevant to the problem considered; variables indicate either choices open to individuals (job, income) or exogenous circumstances (a salary scale or a tax scale). The ethical postulate introduced is the equality of each coefficient among different individuals, offered as an interpretation of the fundamental equality of men. Once the utility function has been defined and tested, justice in distribution is defined as equality of the values of that function for all individuals considered. A numerical illustration is added in which years of schooling and degree of independence are used as parameters to characterize twenty social groups and the just as distinct from the actual income distribution is calculated for the Netherlands around 1965.It affords the Board of Editors great pleasure to publish this paper by one of their members. This gives the Board the opportunity, also on behalf of the readers ofDe Economist, to congratulate Professor Tinbergen most cordially upon his 70th birthday, which he celebrated on 12th April, 1973.