Counterfactuals, Forecasts, and Choice-Theoretic Modelling of Policy / Herschel I. Grossman.

Format:

Book

Author/Creator:

Grossman, Herschel I.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1381.

NBER working paper series no. w1381

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1984.

Summary:

This paper focuses on the problem of formulating an analysis of economic policy that is consistent with rational expectations. Cooley, LeRoy,and Raymon show that the Lucas and Sargent strategy for econometric policy evaluation is itself vulnerable to the logic of the Lucas critique. The present discussion develops the distinction between counter factuals and forecasts to clarify the nature of the inconsistencies in the Lucas and Sargent strategy. The paper goes on to propose and to illustrate a strategy for positive economic analysis that incorporates choice-theoretical modelling of policy. Such modelling can allow better forecasting, but it also shifts attention away from policy actions and their effects and towards the more fundamental relation between the policymaker's constraints and targets and economic outcomes. The forecasting problem in a choice-theoretic model of policy concerns the effects of hypothetical realizations of variables that determine the policymaker's constraints and targets. The analysis of counter factuals in this context recognizes that the parameters of the policy process are not invariant with respect to the processes that generate these exogenous variables. A program of positive economics that includes choice-theoretic modelling of policy also preserves a distinct role for policy advice as part of the process being modelled.

Notes:

Print version record

June 1984.