The Ordinary Business of Macroeconometric Modeling: Working on the Fed-MIT-Penn Model (1964–1974)

Abstract

The FMP model exemplifies the Keynesian models later criticized by Lucas, Sargent and others as conceptually flawed. For economists in the 1960s such models were "big science", posing organizational as well as theoretical and empirical problems. It was part of an even larger industry in which the messiness for which such models were later criticized was endorsed as providing enabling modelers to be guided by data and as offering the flexibility needed to undertake policy analysis and to analyze the consequences of events. Practices that critics considered fatal weaknesses, such as intercept adjustments or fudging, were what clients were what clients paid for as the macroeconometric modeling industry went private.

The Transformation of Economic Analysis at the Board of Governors of the Federal Reserve System During the 1960s

“…The influence of interest rates on state and local public expenditures also received specific attention. 43 That several versions of the model coexisted even after the merger (Backhouse and Cherrier 2019) speaks to the difficulty of developing a model suitable both for 40 We unfortunately do not have records of the discussions regarding the funding of the project by the Board. We do know that, though very expensive, Brill considered it to be "one of the most exciting adventures in which [the DRS] ha [d] embarked."…”

The Transformation of Economic Analysis at the Board of Governors of the Federal Reserve System During the 1960s

“…See Brayton et al (1997) for a brief discussion of the macroeconometric models developed at the Board. 41 See Backhouse and Cherrier (2019) for a detailed account of each group's perspective and on the organization of the (not so) joint work in developing the model. 42 Ando, "Introduction," FMP.…”

Bruna Ingrao and Claudio Sardoni, Banks and Finance in Modern Macroeconomics: A Historical Perspective (Cheltenham: Edward Elgar, 2019), pp. 296, $145 (hardcover). ISBN: 9781786431523.

“…Lastly, the authors completely neglect the evolution of economic analysis at central banks and other key institutions for macroeconomic policy, again failing to provide any evidence of the influence of academic debates beyond academia. In the case of the United States, for example, recent work on the relationship between the Federal Reserve and academics shows that they have different interests and priorities, and have gone through varying degrees of closeness in the past decades (Backhouse and Cherrier 2019;Claveau and Dion 2018;Rancan 2020). It would thus be a mistake to assume that academic debates have always and exactly determined contemporary policymakers' views on banks, money, or the economy in general.…”