The Measurement of Policy Effects in a Forward-Looking Model: An Application to Economic Policy in the UK, 1974-9.

In this paper, the authors present a methodology for measuring the effects of economic policy where expectations are forward-looking. The methodology is then applied to the National Institute model, version 11; in this version, expectational variables appear in several key equations and the model may be solved in a forward-looking or backward-looking mode. The policy period for which the exercise is conducted is 1974-79, a period of considerable economic stress. The results obtained for the effects of policy when the model is solved in a forward-looking mode are compared with those obtained when expectations are formed adaptively. Copyright 1994 by Royal Economic Society.