vol. 58, no. 4 (April), 1992, pp.
A History of Macroeconometric Model-Building
by Ronald G. Bodkin, Lawrence R. Klein and Kanta Marwah
Brookfield, VT: Edward Elgar Publishing Co., 1991, pp. xvii, 573
In today's economics profession, interest in the history of the discipline
and interest in macroeconometric
model-building rarely occur in combination. This volume, then, which
was produced by economists who have built some of those models and made
some of that history, is likely to attract attention.
The three author/editors contributed
a two-chapter "Introduction" and a three-chapter "Summing Up," as well
as a chapter-per-decade treatment of macroeconometric model-building in
the United States during the 1950s, 1960s and 1970s plus individual chapters
on macroeconometric modelling in Canada and of India. All this material
accounts for ten of the seventeen chapters and about half of the book.
Model-building in other countries and the macro-modelling of other economies
comprise five of the remaining seven chapters, which are contributed by
six authors: Anton B. Barten (Netherlands), James Ball and Sean Holly (United
Kingdom), Raymond Courbis (France), Kazuo Sato (Japan), and Abel Beltran-del-Rio
(Latin America). And finally, Roger Bolton and Bert G. Hickman contributed
regional econometric models and multi-country modelling, respectively.
Only two of the chapters (by Barten and Bolton) have previously appeared
The introductory chapter
attempts to root the parametric estimation of macroeconomic systems in
the general equilibrium theories of Walras and Pareto. But apart from the
recognition that "everything depends upon everything else" both in pure
theory and in parametric estimation, the actual lineage from nineteenth-century
general equilibrium theory to twentieth-century macroeconometric model-building
is weak. The historical sketch begins to gain in credibility with the account
of the contributions of Ragnar Frisch and Michal Kalecki in the early 1930s.
Central to the history, of course, is John Maynard Keynes, who, it can
be noted, felt a much stronger kinship to Marshall than to Walras.
Detailed coverage of the
model-builders and their models is not easily presented in readable prose.
The coverage begins with a history of people and their ideas (Tinbergen
in Holland followed by Klein and Goldberger in the United States) but turns
quickly into a history of institutions and their computers (Social Science
Research Council, Bureau of Economic Analysis, Data Resources, Inc., and
Wharton Econometric Forecasting Associates). The first four of the five
trends in the development of macroeconometric model-building as summarized
by the authors (p. 119) help to account for the decreasing significance
of individual macroeconometricians: (1) improvements in computer technology,
(2) increasing use of the team approach to econometric modelling, (3) development
of institutional frameworks largely independent of model originators, (4)
increasingly detailed and large-scale modelling, and (5) increasing theoretical
sophistication. Gains in sophistication came from using longer and more
complex lag schemes, splicing macroeconometric models with input-output
models, and not linearizing non-linear relationships (p. 88).
The authors refer to a genealogy
of macroeconomic models, in which "no other model has left such a vast
legacy of style and flavour as the Klein-Goldberger Model" (p. 57). Discussion
of the direct and indirect relationships of subsequent models to K-G would
have been greatly facilitated by a family tree, but none was provided.
Also, description of the various models follows a common format in which
the number of behavioral equations and identities, the number of endogenous
and exogenous variables, the data base identified by frequency and span
of years, and the peak value and time profile of the dynamic multiplier
are reported. This information could usefully have been summarized in tabular
Four models of the 1970s
are identified as exceptions to the general trend in macroeconometric modelling
in that they are more individualistic than institutionalistic. They reflect
the "vision" of the principal model-builder. But except for the St. Louis
model, which envisions a stable private economy with markets generally
clearing and money having no long-run effect on real variables, these individualistic
models are not particularly visionary in the sense of Schumpeter. The Hickman-Coen
Model features interrelated factor demands; Fair's Forecasting Model couples
his "vision of the economic process" with his "philosophy of forecasting"
in which unconditional short-run forecasts are considered largely—or at
least ideally—a mechanical process. The Liu-Hwa Model uses monthly rather
than annual data in order to give play to the detailed lag structure in
All too frequently, claims,
arguments, and counter-arguments remind the reader of how close Klein is
to his subject matter. This history of econometric modelling is not a disinterested
history. It is claimed that Klein scooped A. W. Phillips by three years
as evidenced by the dynamic solution of the 1955 Klein-Goldberger Model,
in which price stability and full employment are in conflict (p. 62). The
authors defend, on the basis of forecast accuracy as judged by an imagined
"disinterested party," the use of large, detailed models in the "Main Stream"
tradition against models in the New Classical tradition, time-series analysis,
and consensus surveys (pp. 528-9). They report on a 1972 challenge by Robert
Basmann, in which the Brookings Model was criticized as a fuzzy theoretical
structure whose hypotheses were tested with defective data, and a "spirited
defense" of Brookings by Fromm and Klein, in which Basmann is accused of
being pedantic and nihilistic (p. 109-10). According to the book's preface,
this history of econometric modelling benefits from the first-hand information
of the early participants. Unfortunately, the benefits of first-handedness
are partially offset by losses in objectivity and perspective.
In addition to the dismissive
treatment of Basmann's early criticism and the mention without comment
of more recent and more general criticisms by David Hendry and by Ed Leamer,
the authors deal obtusely with New Classicism and the rational-expectations
revolution. "[F]ads come and go, but many ideas that looked extremely promising
when they were first introduced have turned out to be a flash in the pan
(quite unimportant) or else a modest addition to the macroeconometric model-builder's
intellectual capital" (p. 527). The authors do not mention any specific
fad, here, claiming that it would be "ungracious to cite particular examples,"
but the reader can easily make the connection. The rational expectations
hypothesis and the related Lucas critique are characterized elsewhere in
the volume as a contrived argument, not terribly important empirically,
and not rational (p. 552 and p. 556, n. 17). But the rational expectations
critique has, according to the authors, "raised the whole question of the
optimal incorporation of lags into the modelling process" (p. 534, n. 8).
More than a decade ago,
David Hendry  identified the three golden rules of econometrics: Test,
test, and test. The increasing acceptance of these rules as both the hallmark
of economic science and a pre-requisite for publication has almost completely
crowded out the caveats. The authors do not warn the reader of the many
instances in which tests for statistical significance are passed off as
tests for economic significance. Nor do they question the significance
of significance tests when performed not on sample data but on population
data—as is frequently done in macroeconometrics when the object of study
is not market economies in general but, say, the U.S. economy in the postwar
era. The authors fail to acknowledge that any significance test which cannot
be interpreted straightforwardly as quantifying the probability of a sampling
error by analogy to the classical urn model has no meaningful alternative
Although the book ends with
an optimistic chapter on the prospects for macroeconometric modelling,
the reader may feel that Klein and his colleagues are, in effect, closing
the book on the era of growth for large-scale macroeconometric model-building.
Roger W. Garrison
1. Hendry, David F., "Econometrics—Alchemy or Science?"
vol. 47, no. 188 (November), 1980, p. 403.