83 A Small Econometric Model of the U.S. Economy for Classroom Use

A small econometric model has been programmed in a Lotus 1-2-3 spreadsheet for student use. Sample-period-simulation performance, policy multipliers, and applica-tions for forecasting and policy making are demonstrated. Keywords: econometric model, forecasting, policy simulation, multipliers. Econometric models have become the standard method for macro-economic forecasting and policy analysis. According to Paul Samuel-son, even economists accustomed to simpler, more intuitive models &dquo;stand on the shoulders of the giants&dquo; who use models, by subscrib-ing to econometric forecasting services or by comparing their work with that of the modelers. Applied econometric models have become very large, some with iooo or more equations, explaining highly disaggregated elements of the economy. Disaggregation is useful to provide forecasts for detailed elements of the economy that may relate closely to particular kinds of business. It may help to evaluate the impact of specific policy alternatives. But the structure of a large complicated model is difficult to disentangle and understand, and, perhaps surprisingly, disaggregation seems to be of little help in improving the forecasting effectiveness of models. For pedagogical purposes, large systems, like the Wharton model, are impractical for classroom use. A small structural model is sufficient to bring out the essentials of the economy and to demonstrate how models are used. Structure of the Penn Mini Macromodel Our minimum econometric model of the United States economy’ includes only five behavioral equations and three identities. These are summarized in Table i and explained briefly here