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Re-examining Monetary and Fiscal Policy for the 21st Century

Philip Arestis and Malcolm Sawyer

This book provides a much-needed re-examination of monetary and fiscal policies, their application in the real world and their potential for macroeconomic policy in the 21st century. It provides a detailed discussion and critique of the ‘new consensus' in macroeconomics along with the monetary and fiscal policies encapsulated within it.
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Chapter 3: The Macroeconometric Model of the Bank of England

Philip Arestis and Malcolm Sawyer


1 INTRODUCTION In this chapter we elaborate on the nature of the ‘new consensus’ in macroeconomics and illustrate it by reference to the macroeconometric model of the Bank of England.1 In subsequent chapters we examine the implications of this ‘new consensus’ for both monetary and fiscal policy. The purpose of this chapter is to examine the nature of the macroeconometric model, and we do not discuss here the monetary policy regime of the Bank of England even though this macroeconometric model is one of the elements used to forecast economic events on which the Monetary Policy Committee of the Bank of England draw when making policy decisions on interest rates. Inflation targeting is the central objective of the Bank of England’s monetary policy, and that has been extensively discussed in the previous chapter. The Bank of England macroeconometric model is, of course, much more complex than the three-equation model (which was used to describe the NCM) approach in the previous chapter. Even the simplified ‘stripped down’ version of the Bank of England model described below contains more than three equations. There are two features of the Bank of England model relative to the NCM model to which we draw attention. First (and perhaps inevitably), the Bank of England model is an open economy model with equations for the determination of the exchange rate, whereas the NCM model was a closed economy one. Second, whereas the NCM model had a simple Phillips curve type of relationship for price in...

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