On Modeling the Effects of Government Policies.

This article examines the effects of government policies on the U.S. economy as of May 1979. There is strong theoretical justification from microeconomics for the proposition that even anticipated government actions affect real variables. On a macro-economic level this proposition has received some support in my work in the sense that a number of micro-economic explanatory variables are significant in my estimated equations. The possible existence of disequilibrium in the economy provides another justification for the effectiveness of government policies. The proposition that disequilibrium at times exists in the economy has received some support in my work through the significance of my disequilibrium variable. Policy effects in my model are sensitive to assumptions about federal behavior and about expectations in the bond and stock markets. They are not sensitive to whether or not government debt is treated as wealth by households. It may be possible in the future, as outlined in my forthcoming paper, to test the assumption of rational expectations in the bond and stock markets, but it is unlikely that the macro data can be used to decide how government debt is treated by households. The equation that has been estimated to explain federal behavior, an equation in which the federal government is estimated to lean against the wind, appears to be good when judged by conventional statistical standards. A method that was proposed for estimating the expected predictive accuracy of econometric models indicates that the present model is more accurate than other models. These results thus provide some tentative support for the proposition that even anticipated government actions can affect real variables. To conclude, it is interesting to speculate what the status of the debate about the effectiveness of government policies will be forty-three years from now in 2021.