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The Soothsayers of Macroeconometrics

19.09.11

Macroeconometrics is the fitting of equations suggested by economic theory to historical data. For example, John Maynard Keynes famously suggested that consumer spending would follow a “consumption function,” in which spending would rise with income in a predictable fashion. Macroeconometricians will a fit a consumption function to historical data in order to try to forecast the effect of, say, a tax cut on consumer spending.

Macroeconometrics was once at the cutting edge of economic research. The very first Nobel Prizes in economics, awarded in 1969, went to Jan Tinbergen and Ragnar Frisch, two pioneers of macroeconometrics. Macroeconometrics was honored again in 1975 and 1980, when Tjalling Koopmans and Lawrence Klein were awarded Nobels.

These and other pioneers overcame a number of technical hurdles facing macroeconometricians. However, in subsequent decades new problems emerged, and some of these problems proved to be insoluble.

In 1976, Robert Lucas suggested that economic behavior could respond to policy changes in ways that would cause macroeconometric models to make systematic errors. Lucas was awarded a Nobel in 1995. It has since become standard in economic research that empirical work must be able to meet “the Lucas critique.” Because traditional macroeconometric models fail to do so, they have disappeared from peer-reviewed journals in economics.

Source: The American