Forord

Arbeidsnotater nr. 12 er avtrykk av en artikkel som er inntatt i tids-

skriftet Economic Modelling (Volume 2, Number 1, January 1985).

Vi takker utgiveren av tidsskriftet for å ha fått tillatelse til å gjengiartikkelen i serien Arbeidsnotater.

Tore Eriksen er underdirektør i Økonomiavdelingen. Jan F. Qvig-

stad, tidligere underdirektør i Økonomiavdelingen, er nå ass. direktør

i Norges Bank.

Artikkelen er forminsket fra A4 til A5—format. Vi håper at dette

ikke har gått for sterkt utover lesbarheten.

ØkonomiavdelingenFinansdepartementet

September 1985

Thorvald Moe

t

The use of macroeconomic modelsin economic policy making

The Norwegian experience

Tore Eriksen and Jan Fredrik Qvigstad

Planning in Norway has a long tradition. The use of models is an integral part ofshort- and medium-term economic policy administration. A large-scale ittpul-output model, MODIS IV, is ttsed as the short- and tnediuirt-term forecasting andplanning rnodel. The use of tlte model secures consistency wlten analysing thceconomy. The model is very open in the sense that important interrelations in theeconomy are left out. The model contains only ‘good’ relations in the LeifJohansen sense of the word. Smaller aggregate and more closed versions of themodel are ttsed for analysing policy alternati ves. These models contain both 'good 'and ‘bad’ relations. The use of macroeconomic models is an important aid forproposals regarding economic policy in the Ministry of Finance. Because thewhole ministry (with expert help fram other tninistries) takes an active part in themodel work, MODIS IV serves as the centralizing inechanism. lt helps to makeeconomists from many ntinislries go around the same centre, speak the same‘language’ and organize all relevant information and judgements in a consistentway. Experience shows that ‘numbers discipline’ attd force the different argumentson to a higher level of precisiott.Keytvorrls: Macroeconottttc models; Planning: Norway

This paper describes the models used as an analyticalaid in short- and medium-term economic policymaking itt Norway. The emphasis is on how modelsare used inside the administration rather than on themodels themselves. This paper is written by ‘insid-ers`. A sympathetic ‘outsider’s' view of the Norwe-gian planning system can be found in Barker [l].

The Norwegian national budget is the official planfor thc forthcoming year, not only for the publicsector, but also for the economy as a whole.‘ The

'Thc fiscal budget ts presented to Parliament at the same time asthe national budget.

The authors are with The Royal Norwegian Ministry ofFinance. Box 8008, Dep. Oslo 1. Norway.

This paper is an extended and revised version ol Ovigstad [8l.VICWSexpressed here :tre those of the authors and should notncccssarily hc tntcrprcted as representing official views m theMinistry ol Finance. We would like to thank John Llcwellyn.OECD. lot many useful comments.

Final manuscrtpt received 8 May 1984.

budget sets out a comprehensive plan for fiscal.ntonetary, income, industrial and labour marketpolicies. Targets for econontic policy are presented,together with assumptions about factors that areoutside government control.

This has been the practice for many years. ln 1945the Labour Party gained a tnajority in Parliament forthe first time and wanted to put into effect its ideasfor a planned economy. The immediate post-warperiod had a mood of optimism, reconstruction andnational utiity and this helped to pave the way fornew ideas. The first national budget was presentedby the government to Parliament in 1947 and waslater supplemented by a four year plan called thelong-term programme. lmportant preæonditions forthe national budgets and long-term ptogrammcswere

(i) the construction of a system of nationalaccounts;

(ii) the new economic theory of Keynes, andFrisch`s ideas about planning;

0264-9993I8SI0l0O59~08$03.00 © 1985 Butterworth & Co (Publishers) Ltd 5

Macroeconomic mode/r in Norwegian economic policy making: T. Eriksen and J. F. Qvigslad

(iii) the prevailing political situation.

The national accounts were geared quite early ontowards a system for economic planning under thedirection of Aukrust, who also was influenced byFrisch, Leontief and Stone. Inputæutput tableswere included in the national accounts from 1949.By the middle of the l950s operational routines forthe construction of annual national accounts werewell established, and by the end of the 1950s the firstelectronic computer was installed. In 1960 the firstinput-output model, called “Model of DisaggrcgatedType‘ (MODIS I), was worked out. This model hasan aggregation level very close to that of the nationalEICCOUTIIS.

Keynes' contribution to economic theory and theimplications for economic policy are well known.Keynes (both personally and his theories) played aparticularly important role in Norway, probably dueto Frisch and his position in Norwegian society.Letters from Keynes to Frisch were even referred toin the Norwegian Parliament in 1934.

Frisch talks about the different stages in economicforecastingz.The first stage is the “on-lookerapproach', where the observer tries to guess whatwill happen without analysing what ought to be doneto influence the course of affairs. A more advancedstage is the ‘feasible instrument approach’, wherethe analysis takes place within a complete model inwhich the degrees of freedom correspond to theinstrument variables and the pure exogenous vari-ables. With such a model an attempt is made to pickout the feasible alternatives and to help the author-ities find out which is the most desirable from theirpoint of view. The last stage is the “optimalizationapproach`, which includes a preference function andtechniques for locating the most preferred solutionamong the feasible policy alternatives. Planning inNorway has never reached the final stage, a stagewhich perhaps is unrealistic in real-world policymaking.

In the early post-war period, the Norwegianeconomy was governed by a much more widespreadsystem of rationing and direct controls. The inten-tion of the national budget was that it should be anoverall plan for the whole economy. This wasreflected in the administrative set-up for the budget-ary process. The various ministries should makeplans for their respective spheres which the Ministryof Finance should then coordinate. The nationalbudget was thus heavily based on contributions fromthe other ministries. Today most of the directcontrols, eg for imports and the system of rationing,

:See Frischl5].

6

have been abolished. There is more of a marketeconomy. the private sector being governcd by asystem of taxes and general indirect measures. Thegovernment sector, however, has increased, a sectorwhich traditionally ‘belongs’ to the Ministry ofFinance. These institutional changes are reflected inthe national budget. The Ministry of Finance is nowthe main author, although inputs and contributionsfrom other ministries are still an important part ofthe process.

The notion of planning the economy met fierceopposition in the first years from the ConservativeParty. However, a consensus has been reached onthe need for a national budget. National budgetshave been presented and the model apparatus hasbeen used by all governments since the war, bothLabour and non-Labour. The capabilities and loyal»ties of the civil servants are also recognized. Onemust bear in mind that Norwegian society is ratherhomogeneous.

Successive versions of MODIS have been de-signed to make it operational as a tool for theMinistry of Finance. There has been a two-waychannel of adaptation, the Central Bureau of Statis-tics being the data supplier and model builder andthe Ministry of Finance being the main user. Today,MODIS IV is an integrated part of the day-to-dayroutine of the economists in the Ministry. Thisadministrative set-up has its pros and cons.

(i) The producers of the statistics and the modelbuilders are close, giving positive feedbacks tonational accounting as well as to model build-ing.

(ii) The models are to some extent built aloof fromthe political climate. The models represent astable element, and are in practice accepted byall major political groupings.

(iii) One disadvantage is that the model buildersare not directly confronted with the concretepolicy questions that need to be answered.

A brief description of MODIS IV

MODIS IV is the central model in the nationalbudgetary process. It is well documented in severalarticles and books, the most complete descriptionbeing in Bjerkholt and Longva [2]. Only its keycharacteristics are summarized here.

MODIS IV may be described as a demand-oriented model with a detailed input-output core.The input-output part of the model describes thetechnological and cost structures of the economy.The inputæutput matrices, as well as the rest of themodel, are updated every year.

ECONOMIC MODELLING January 1985

l

Mocroccoiioiiiic mode/x in Norwegian economic policy making. T. Eriksen and J. F. Qwgslad

‘Pure’ exogenousvariables

, , Exogenousl- -P Policy variables vmmbles

Figure I. 'Ille national budget process.

“Variablcs exogenous in the model but not in the economy.

In the quantity part of the model there is aconsumption block and an import block. Changes inimport shares, however, are determined exogenous-ly. Private investments, exports, and governmentexpenditure are also all given exogenously. In theprice part of the model, prices are either exogenous-ly determined or determined by costs and mark-uprates. There are separate direct and indirect taxmodels. The input of the tax models is almost asdetailed as the actual tax rules.

A few figures indicate the size of the model. Itcontains 122 industrial production sectors and 182industrial commodities. There are 17 general gov-ernment production sectors and 10 marketed gov-ernment services. Altogether, the model has about2000 exogenous variables. The output from themodel consists of values of about 5000 variables?The set of output variables can be aggregated inalternative aggregations. The whole set of inputvariables is divided into subsets. For each subsetalternative levels of aggregation can be defined inadvance. In normal use of the model, it is necessaryto supply values for only 400-500 exogenous vari-ables.

The preliminary version of the annual nationalaccounts (with input-output tables) for year ifl.published in March of year t, serves as the databasefor the model. The updating of the model is done bythe Central Bureau of Statistics and is usuallyfinished by the beginning of July. The model is thenready for the final work of the national budget foryear 1+l. This work takes place in July-Septemberof year l, although planning economic policy startslate in year i-I.

The administrative process

The central document describing the government'seconomic policy for the forthcoming year is, asdescribed above, the national budget, presented to

'Even so, requests for yet further disaggregation are noiinfrcquently expressed by Ihc other mini: ries, :ind by the politicalleadership in the Ministry of Finance!

ECONOMIC MODELLING January 1985

MODIS IV

The general budget --1ol the mot economy

Thecreditbudget ——Jtor the money economy

Parliament each October. It is revised in May thefollowing year in the light of the major wagesettlements (which usually take place at that time)and other relevant new information, with MODISIV playing a central role. The credit market is partlyrcgulated through credit rationing and a system ofstate banks. The plan for money and credit policy isgiven in the so called `credit budget‘, which is animportant part of the national budget. In making thecredit budget use is made of the KRØSUS model.‘The input to this model comes partly from MODISIV and partly from policy decisions. Figure 1describes the national budget process.

The Economic Policy Department of the Ministryof Finance is responsible for the national budget.Filling out the forms for exogenous variables is doneby economists in this department. Responsibility isdivided according to the behavioural relations in anystandard macroeconomic model. One person isresponsible for private consumption, another forinvestment, and so on. Most of the analysis is thusdemand-oriented. There is also, however, directinformation from the production side. Sector andsupply side analyses are also carried out.

Considerable work has been invcsted in makingthe model input fit the actual `language` of theadministration. In certain areas where detailedinformation is not available, it is necessary tooperate at a rather aggregative level (eg changes inimport shares) whereas iii other areas inpiit is moredetailed (eg tax input). The input is adjusted to thelevel and form of the actual information.

Some of the current information is in the form ofquarterly data. Other information is obtainable onlyin annual form. A logical extension of the dis-aggregative philosophy of MODIS IV would be tohave MODIS as basically a quarterly model with theoption of time aggregation according to the actualform of the information. However, at present thishas to be done outside the model.

Usually the model output is analysed at a level ofaggregation of about 20 industrial sectors. However,

'For a description of this model, see Bank of Norway [3].

7

Macroeconomic modeLr in Norwegian economic policy making: T. Eriksen and J. F. Qvigslad

experience is that the cost and production structureof the industries are quite different, and sometimespolicy recommendationsare made only after study-ing the results at a lower aggregation level; onoccasion disaggregation matters.

Annual updating of the model has proved to beuseful, especially after the big increase in energyprices and the emergence of the oil sector in theNorwegian economy. However, on occasion thebase year may be ‘atypical’ for certain industrics,5 sothat it would have been better in that case toestimate the parameters in the input-output struc-ture with a two- or three-year moving average. Onthe other hand, that would introduce practicalproblems, because simulation of the model wouldnot reproduce the base year automatically.

In certain areas of the economy it is natural tothink in nominal terms (the credit budget), whereaselsewhere real terms are more appropriate (produc-tion). Furthennore. it is sometimes appropriate tothink in terms of levels (balance of payments) whileat other times growth terms are more relevant(production inipulses). The economists in the de-partment can choose whichever combination ofnominal/realtermsand level/growthtermsis practic-al. This point may seem trivial from a theoreticalpoint of view, but is nevertheless important when amodel is used in the daily routine of an administra-tion.

As an aid in the final productionof the nationalbudget, three or four simulations of the model areusually required. The reasons for this are as follows:

(i) Although policy analysis always starts with thegeneral guidelines of the governmenfs econo-mic targets, it is almost invariably .the case thatthe policy variablesneed to be analysedfurth-er.

(ii) There is a continual flow of new informationabout the exogenous variables, particularly the'pure` exogenous variables that are indepen-dent of the Norwegian economy (eg intema-tional economic developments) (see Figure 1).

(iii) Analysis of the model results will influence thejudgement of these model exogenous vari-ables. The successive simula iuii may belooked upon as an ‘iteration’ process to help toclose the possible range of the model exoge-nous variables (and the policy variables). Theiterationprocessis shown by the dotted line inFigure 1. Because of the disaggregated level ofthe model output, the model output can be

‘For example, sectors producing big units like oil productionplatforms.

8

confronted with detailed actual knowledge ofthe economy, current indicators, etc. Themodel results will also influence thejudgemental overrides to the behaviouralequations(eg the consumptionfunction).

Imports can be taken as an example of the way theanalysis is carried out. Import shares are determinedin two ways. From the demand side it is assumedthat relative import prices are the main determi-nants. They are, however, also determined from theproductionside, and the ministryanalystswill haveviews on production levels based on current indica-tors, supply-sideanalysisand on direct informationfrom the Ministryof Industry.MODIS IV helps toreveal any overdetermination, and thereby forcesconsistency(in the system.

Because the whole department (with expert helpfrom other ministries) takes an active part in themodel work (filling out the forms of exogenousvariables, etc), MODIS IV serves as the centralpoint of the department in the same way asINTERLINKdoes in the productionof intemationalforecasts by the Economics and Statistics Depart-ment of the OECD.° It helps to make the econom-ists of a large ministry go around the same centre, tospeak the same ‘language’ and to organize allrelevantinformationand-judgementsin a consistentway. Experience shows that “numbers discipline',forcing the different at, ments on to a higher levelof precision.

Thus the economic content of MODIS IV isrelatively simple, and judgement is put into the fewbehavioural relations there are. In use, MODIS IVis primarily an advanced accounting system, but assuch it is very useful. It may be better to describeMODIS IV as a national budget routine, whichensures that the identities are fulfilled, rather than anational budget model

The use of support models

The model can be described as open because thereare so many model exogenous variablesf' A numberof support models have been developed duringrecent years. One use of these models is to deter-mine variables which are model exogenous inMODIS IV. MODIS IV and the support modelsmake up together what can be termed a modelsystem. MODIS IV is closed throughthe iterationprocess, including a sequence of simulations on the

“SeeLlewellynandSamuelson[7].7Evcn an ‘open’ model is of course well defined as a system ofequations.

ECONOMIC MODELLING January 1985

>

2

y\'Ill(’I'0€('0IIOIlll(Hl4I(I('I.\m .’\’uI'n'¢'_1,'1uI1uruumnrc policy iriulrttig. T. Ifrt/x.u'I1um] I F. Qrttniltttl

model system. Thu support models inay for illustra-tive purposes he dividcd into pre-models and post-models. Prc-iiiotlels aie small models that arc usedto tlctcrmine the value of the inodel exogenousvariables bcforc a MODIS IV siinulation is carriedout. Thcy are not formally connected to MODIS IV.and arc used only as one of many tools m thedetermination of the exogenous variables. KRØSUScan he taken as an example of a post-modcl (secFigure I). However. because of thc iteratioit pro-ccss. the distinction between prc-iiiodcls and post-models may not be very clear. For instancc. KRØ-SUS may as `st post-niodel anal is of the effectsfrom the goods market to thc financial markets‘ As apre-modcl it may hc used to analyse the cffccts fromthe financial markets to the goods market.

The translation from one set of dcfinitioiis toanother. howcvcr. has proved to hc timc-consumingboth in actual use and in the maintcnance of themodels. In general. dcfinitions and solutions are notconsistent bct\vccn MODIS IV and thc supportmodels.

Within thc administration. as in any Organization.it is difficult to discuss everything at the samc time.It is necessary to structure the anal sis. In theMinistry this is done by separate disc ons on thcdiffcrcnt exogenous variables as thc first stagc. and aconsistency check with thc help of MODIS IV as thesecond stage. The third stage is a more detailedstudy of the results. The support models are heavilyused at all stagcs. together with more or lessformalizcd methods. This analysis requires so muchwork that there is seldom time to work out detailedalternativesto thc main referencepath. Undcrlyingthis reference path are the gtiideliiies for policy.which of course may iinply a change in presentpolicy.

Policy alternatives

Although the bulk of thc work is directcd towardscstablishing the reference path. there is a continuingsearch for policy alternatives. that can on occasionrepresent significant dcpartures from thc rcfcrcnccpath. The need for analysing changes in policy mayemergc suddenly, for example because of a changein government, unexpccted developments concern-ing wagc settlemcnts or an oil price rise. For minorchanges. it is possible to use ready reckoiicrs orimpact tables. These tables, produced annually. givedetailed results for the endogeiious variables ofchanges in specific exogenous variables. Thcy cansave a lot of time. In the case of. for example. adevaluation. complete analysis with the help of

ECONOMIC MODELLING January 1985

MODIS IV and KRØSUS would take too long:especially bccausc of the openness of the models.several model simulations would be required. Oiithe other hand. on occasion thc use of impact tableswill often be too rough.

The purpose of such policy analysis should he toelabor-.ttc. though not ncccs.. ily in full detail. analternative to a well established reference path.When clioosing bctwcen the reference and alterna-tive paths. the politiciaiis usually ask for some keyvariables such as employment. inflatitiit. balance ofpayments, real incomes. etc. This is less detailedinformation than is required in thc national budget.but more advanced information than what can beobtaiticd by impact tables. Some of the stipportmodels to MODIS IV arc designed for this type ofanalysis. FINMOD is takcn here as ati example. Themodel is designed especially to analyse on anaggregate level changes in fiscal policy. and changesin the exchange ratc.

FINMOD includes an aggregate version ofMODIS. lt has only four production scctors. and is amuch iiiorc closed modcl than MODIS IV. Some ofthe standard chains of rcasoning that arc normallyused bctwcen the modcl simttlatiotis of MODIS IVhave hceti used to 'closc` thc model. Thus muchmore behaviour is modclled in FINMOD than inMODIS IV.

To illustrate the use of FINMOD. a brief descrip-tion is presented. Export and import market sharesin FINMOD arc determined as functions of relativediffcrcnccs between Norwegian and world marketprices. Wagcs are dctcrinincd iii an cxtcndcd Phil-lips curvc equation, including also tax parameters,consumcr price expectations and extcrnal competi-tivencss of thc Norwegian economy. Productivityand labour supply arc also cndogenous. FINMOD isa demand-oricntcd model. almost as much asMODIS IV. It can hc rcgardcd as an aggregateversion of the MODIS IV iteration process.

Even if FINMOD is a closed modcl comparedwith MODIS IV, it is still a partial modcl in so far asthe supply side and the money and credit marketsarc not modelled." Repercussions from the financialmarkets and supply side analysis inust be taken careof outside the modcl. However. if thc purpose is toconstrttct a new reference path. thc money andcredit market implications cvcntually will be thor-oughly analysed by the KRØSUS inodcl in thcMODIS IV process.

‘N 'ither is thc dctailcd checking of thc model iesiilts i' thc ciirrcnttndicators. nor the ccononitsls' `Ftngcrspitl (iefuhl` for actualnumbers modelled. These clcinents arc very important in thcMODIS I\' process.

9

Macrm'L'onumi¢' models in Norwegian economic policy makmg: T. Erikrcri mid J. F. Qiiigsiatf

As far as possible, estimated parameters arc usedin FlNM()D. However, for key parameters inFINMOD. well establishedeconometric work eitherdoes not exist, or it is not possibleto determine tlieparameters with significant confidence. For inst-ance. in the import share functions. relative pricesandimportshareshavemovcdmore or lessin thesame direction over the last 20 years. lt is, accor-dingly, difficult to distinguish between trend andprice clasticity effects. In the wage equation it isdifficult to establish the values of the parameterswhichgivetheeffectofchangesinindirectanddirecttaxes. Therefore, when modelling some of thebehavioural cquations, it is necessaryto go beyondthe econometrics. Some important parameters aredetermined by judgement. not by estimation. Theeconomic policy makers have to make decisions.The use of models is one way of making theassumptionsexplicit. 'Formalizing judgement‘ is notideal but it does have advantages:

(i) lt increasesthe need for being explicit in theanalysis.

(ii) lt is one way of accumulating knowledge. lt isnot necessaryto start from scratcheach time aspecific problem arises, and it serves to docu-ment the standard reasoning and to givecontinuity to the knowledge. This is importantsince labour is a mobile factor, even in thegovernment sector.

(iii) The need for econometric work is madeexplicit. The model can be regarded as a“shoppinglist' for research projects from theMinistry.Consistciicy of the parameters is ensurcdacross the different problems that are raised.The elasticity of the labour supply. for exam-ple. cannot easily be varied to give pleasantanswers to specific problems!

(iv

There is, however, a danger of the results beinggiven too much weight because they are generatedby a `model`. Usually. analystsin the Ministry try toavoid this problem by always giving the resultsspecified as intervals. depending on one or two ofthe central judgemental parameters.

When usingFINMOD, the first step is to generatea reference path which is identical to the MODIS lVreference path. However, even if the same cxoge-nousvaluesare used, FINMOD and MODlS lV willin general not generate the same reference paths,because:

(i) FINMOD is a much more aggregative model(ie aggregation matters).

(ii) The behavioural cquations that are explicitly

lO

modelled in FINMOD may differ from theimplicit cquations (through the iteratioii pro-cess) in MODlS lV.

Even though. in principle. these (implicit andexplicit)relationsshouldbe identical.the MODlSlV processdoes, to a greater extent, make use ofactual detailed knowledge. In FINMOD. therefore.add-factors are determined so that FINMOD repro-duccs exactly the MODlS lV reference path. Theadd-factorscanbethoughtof asstochasticvariableswith expected values that equal zero. After coordi-nating the FINMOD and MODlS IV models, theymay have values that differ from zero. A disaggre-gatedmodelsuchas MODIS IV incorporatesin-formation which. in an aggregativemodel. isput intotheadd-factors."

Another aggregate version of MODlS lV. calledMODAG. has recently been built. This model hasapproximately30 productionsectorsaggregatcdfrom MODIS IV by the principle of strict hierarchy.Because of its smaller size, it was possible toprogramthe modelin the intcractivedatasystemTROLL. Routines have been developed that auto-matically transfotm MODIS IV output to MODAGinput.RoutineshavealsobeendevelopedsothatupdatingMODIS IV and MODAG is almostthesame job. The MODAG model has also beenextended ~ more closed, experimental versions ofthe model have been built. There is now a MODAGsystem which includes many of the `old` supportmodels.

Accordingly. the options now are MODIS IVas the dissaggregated open budget model. andMODAG asthe more aggregatedmodel systemwithflexibility in the degree of openness, suitable foranalysis of the policy alternatives. The FINMODmodel is incorporated as the most closed MODAGvariant. MODIS IV, however, will probably survive.MODAG is at present thought of as too aggregatedto be usedasthe main tool in the budgeting routine.

Some general problems in model buildingand use of models

A general problem in model building is whatvariable to treat as exogenous. and what to try toexplain endogenously. The answer depends muchupontheuseof themodelandtheviewpointof themodel user. From what may in Ragnar Frisch`sschemebe tcrmed as an on-looker approach, it may

"A descriptionof FINMOD is given in Ovigstad [9] and TheRoyalNorwegianMinistryof Financell()l. A moredetaileddescription is given (in Norwegian) in Eriksen. Ovigstad andRødseth[4].

ECONOMIC MODELLING January I985

.

.J

.\Iacroe>(0num:(lIl(I(l4.’[\iii .Nartiicgiititccmiiziiiicpnlicgt'Inrlkmg.T EriksciiruitlJ I* (lrigrliid

scciii natural to explain as much as possible withiiithe model. For models designed for policy making.which clcarly is the case for the Norwcgiati nationalbudget iiiodcl MODlS lV, the case may be some-whatdifferent.

Advances in ccoiioiiiic theory and iii contputingmethods have made it possibleto extcnd thc sctsofendogenousvariables in planning models. and clear-ly this has been thc trend. According to Professorl,cif Johansen, tcndencics in the economic environ-

mcnt may be sonievvhatcontradiciory to this (Johan-sen [6l):

(i) the growth of the public sector:

(ii) the increasing rolc of organizations and largecorporations;

(iii) the increasinginfluence of international cotidi-lions (applying to national models and inparticular to sniall countries).

Johansenalsoexpiesscsa more general view on howto design model systems:equations cxpiainiitg eco-noiiiic behaviour should be ranked accordingto thcii‘goodness’. Models and procedures of using modelsshould be carefully arranged so as to discriininatcbetween good and bad relations. as the weakncsscsof the latterwill affectthe outcomeof the wholeapplication of tlie model. which might hc a non-efficient use of information and model systems.

This is reflectcd in some sensein the Norwegianniodcl system. The core of the system. MODIS IV.contains a detailed national accounting frameworkwith few and mainly non-controversial behaviouraland tcchnologicalrelationships.The lessreliable andmoic experimental cquations are organized in thesystem of support models. Which support modelsslioiild be used, and which versions, may varyaccording to the purpose of the simulations; ieshort-term v medium-term analysis.purc forecastingi' policy analysis, and so on.

Concluding remarks

If the Norwegian system of models is regarded asone big inodel. then this model is in principle notvery different froni other large macro models. Theyare all large. closed and disaggregatedinput4tutputmodels. The uniqucness of the Norwegian systemperhaps lies in:

(i) The way thc models are integmlcd fn theudniinislraiioii. The models are not on thesideline operated by a group of technicians;they are considereduseful in the daily routinesof the whole Ministry. This special feature canperhapsexplain the strongposition the nation-

ECONOMIC MODELLING January 1985

al budget and economic planning enjoys iii thcNorwegian society.

(ii) The l’(’f_\'dtmggregatedapproach, with annualupdating of the model base including thcinput-output matrices. The reason for this isprobably the close link between the modelbtiilders and the national accountsstalisticitiiis.Pcihaps the iiihcritancc of Ragnar l-'risch isanother reason; he never did anything on asmall scale!

The strong side of `the big Norwegian mndel` is itsuscfulncsswhen working out what. in this paper. hasbccn called the reference path. The weak side hassofar been the analysis of policy altcrnaiivcs. Suchaualyscshave often been done ml Iioc. The tlcvcliip-ment ofsupport models has improved this branch oftlie work.

Sonic of the basic questions in macrocconomicmodelling are not easy to answer. including:

(i) the optimal level of aggregation;(ii) how open/closed tlie model should he. ie how

much should be left to add-factors antl cxogc-nous variables endogenized through an item-tton process:

(iii) how to treat 'judgemenf when using theniodel.

This paper has tricd to give some of thc Norwcgiaiiexperiencesconcerningthesequestions.The prcsciitsystem operates at fairly low cost. Nevcrthclcss. ifwe wcic to start the whole model-building processafresh. perhaps we would choose lessdisaggregzitionm The investment has bccn stibstan-tial. lt woitld also have been easier to implcniciitMODlS IV in one of the intcractive programpackagesalreadyon the market." In decidinghowto close thc model. it seems appropriate lo take avery pragmatic view. Mitch dependson the adminis-trative set-up. But no matter how closed anddisaggregatcdthe model. there will iihvaysbc a needfor judgement either in the form of ridd-factors. bymanipulating parameters. or by varying thc exoge-nousvariables in different simulations. lt isessentialto make cxplicit what is `judgement` and what is 'thcmodel’.

When decidingupon the type of model thai shouldbe developed. there is always the choice bctivccneconomic complexity and administrative simplicity.

"'l`lic MODlS systemhasbeencxpurtedto Portugal:indJantaiczi.These models are much more :iggrcgaiite than thc Niitwt-gninMODlS [V This is pttrtly due to thc less dcvcltipcil nationalaccountsin thesecountries."MODIS IV is programniedin DATSY. a data languagec\pcctally designedfor this purpose.

.v\/Im-roccm:onm'iiiorlelx iii .Vorweginiieconomic policy iiiiikiiig; 'l`. lírikscii am! I F Qvrgwad

We have argued that from an administrative point ofview, il is often prcferahle to have a simple model asthe national budget routine for short-term planning,a model

(i) which can be partitioned into separate hlocksand \vhere sintultaneity is kept to a minimum;

(ii) where thc relations contain a minimum of lags.

This is because it is often necessary for a group to'think aloud‘. Our experience is that the bigger thegroup. the simpler is the model that is appropriate.lt should also be possible to explain the results tonomeconomists without too big a pedagogical effort.Of course, these crilcria cannot be adopted withoutsacrifices. For example. when having to choosehetwcen two alternative formulations of the con-sumption function. one with and the other without alag, the one with lag was marginally better accordingto the econometric criteria. But after a couple of

References

l T. Barker. .-\ Review of Mmlelx and Dam in ilieiVorn/egiaii .S_v.\'I('Inof Economic Planning, GPP 511.Department of Applied Economics, University ofCambridge. 1981.

3 O. Bjcrkholt and S. Longva. MODIS IV, ii Model forEconomic Analysis find Nnlioiinl Planning. Samfunns-tikonomiske studier no 43, Central Bureau of Statisticsof Norway, 1980.

3Bank of Norway, A Credit Model for Norway, NorgesBanks Skriftserie no 6, Oslo, 1978.

4 T. Eriksen, J.F. Qvigstad and A. Rødseth, Finriiixpali-iilvkeiiidikaiorer og en fiiinnspoliiisk iiioilell, Arbeids-itotatei' no 2. Economic Policy Department, Ministry ofFinance, 1981.

5 R. Frisch, A Survey of Typer of Econoiiiii' Foreciixiiiigund Progrriiiiniiiig and a Brief Dexrriplion of ilie OsloCliaiiiiel Model, Memorandum from the Institute of

months the tagged relationship was dropped. be-cause the marginal gain in thc preeision of forecast-ing was more than offsct by the increase in adminis-trative costs. In addition. all the policy rccommcnda-tions were to all intents and purposcs invariant to thechoice between the two functions. lt must never hcforgotten that in an administration the constantrivals to the complex macro model are caleulations(and theories)” on the back of an envelope. Thecomplex model will lose out the very first time itsresults cannot be explained; thc administrationscltlom gets as much time for explanations as theunivcrsity lecturer has when he is giving classes.Because, at least in the Ministry of Finance. modelsare aids for decisions on economic policy. they areuseful only if they contribute to bctter decisions.

"Eg the Laffercurve.

Economics, 13 May 1961, University of Oslo.6 L. Johansen. ‘Econometric models and economic

planning and policy: Some trends and problcmsfl iiiCurrent Deiv-elopineiii in llie lurer/life: lfconniiiirt.Ifrononielriex, Mnllieiiialirx. pp 91-122. D. Reidcl.Dordrccht. 1982.

70.13.]. Llewcll)n and L. Sainuelsoii. 'The analyticfoundation of international economic modelling at theOECD`. Joiininl of Policy .llorleliiigu Vol -l. 1982. pp261-273.

8 J.F. Qvigstad, The Use of .iVliiei-oemiioiiiic .l/Iorlels' iiiEconomic Policy Making The Norwegiiiii If.’ ('ru'm'('.GPP 519. Department of Applied Economics. Uni-versity of Cambridge, 1982.

9 J.F. Ovigstad. A Firral Policy il/loileljin' Norway, GPP521, Department of Applied Economics. University ofCambridge. 1982.

ltl Royal Norwegian Ministry of Finance. Tlii' iViiiiuiirilRiidgetofNoriifay, I982, cxtracl of Report No l to thcStorting, 1981-82 (see Anncx).

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