Using macroeconomic models in policy practice: The relationship between models and reality

This chapter illustrates how in the use of macroeconomic models for policy purposes there is a mutual relationship between economic methodology and policy practice. The design of models and methods is much influenced by the actual political need for policy analysis and by the specific economic circumstances. In principle, model based calculations aim at separating the debate on the functioning of the economy from the negotiations on the trade-off between the policy objectives on the basis of the different political preferences. In practice, however, the model calculations are also used to separate the matters on which one agrees in the policy debate from the matters on which one disagrees. Therefore, this review of macro model based economic policy analysis demonstrates that good forecasts of future developments and a good assessment of appropriate policy measures will always require a combination of model and man, of science and art. We do not have to fear that, even with ever more advanced artificial intelligence, man will not be needed anymore to forecast and plan the future.