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Macroeconomic researchers use a variety of estimators to parameterise their models empirically. One such is FIML; another is indirect inference (II). One form of indirect inference is ‘informal’ whereby data features are ‘targeted’ by the model — i.e. parameters are chosen so that model-simulated features replicate the data features closely. Monte Carlo experiments show that in the small samples prevalent in macro data, both FIML informal II produce high bias, while formal II, in which the joint probability of the data- generated auxiliary model is maximised under the model simulated distribution, produces low bias. They also show that FII gets this low bias from its high power in rejecting misspecified models, which comes in turn from the fact that this distribution is restricted by the model-specified parameters, so sharply distinguishing it from rival misspecified models.

We examine the empirical evidence bearing on whether UK trade is governed by a Classical model or by a Gravity model, using annual data from 1965 to 2015 and the method of Indirect Inference which has very large power in this application. The Gravity model here differs from the Classical model in assuming imperfect competition and a positive effect of total trade on productivity. We found that the Classical model passed the test comfortably, and that the Gravity model also passed it but at a rather lower level of probability, though as the test power was raised it was rejected. The two models’ policy implications are similar.

This paper studies the effects of global shocks, relative to domestic shocks (productivity, mark-up, and demand shocks), in accounting for US business cycle fluctuations. We do this by developing and estimating a two-sector open economy dynamic stochastic general equilibrium model that features several real frictions and structural shocks. The central finding from the estimated model is that global shocks are the main driver of movements in many US macroeconomic aggregates. Particularly, we find that they explain around 40% of the variations in our main variables of interest—output and real exchange rate. This important quantitative contribution is achieved by using indirect inference estimation techniques to test the model. We identify exogenous world demand, oil price shocks, preference for exported energy-intensive goods, and the price of imported energy-intensive goods as the global shocks most prominent in causing the largest variations in economic outcomes. By contrast, foreign interest rates and preference for aggregate exported goods are found to be bystanders.

John Taylor is one of the foremost economists of our generation. His ideas were implemented in central banks across the world during the period of price stability, economic growth and financial stability that followed the 1980s. Of course, this period culminated in the financial crisis of 2008, which was followed by a very slow recovery, which, eight years on, can hardly be said to be complete. This short book presents Taylor's view of the financial crisis and its aftermath as expressed in the 2014 F. A. Hayek Memorial Lecture. He believes that the rules-based monetary policy that he espoused broke down in the run-up to the crisis and afterwards. Furthermore, other aspects of policy became erratic and discretionary to the point that the rule of law could be said to be under threat. According to the author, these problems contributed to the crisis and to the slow recovery - indeed, they were a major cause. Two commentaries follow John Taylor's lecture. One is by Patrick Minford and the other is by the Bank of England's Chief Economist Andrew Haldane and Amar Radia. Both recognise Taylor's immense contribution to economic theory and policy. The commentaries are themselves an important contribution and they are followed by a response from John Taylor which addresses the issues raised by the commentators.

DSGE models based on New Keynesian principles, which have been extended to allow for banking, the zero lower bound on interest rates (ZLB), and varying price duration, can account well for recent macroeconomic behavior across a variety of economies. These models find that active fiscal policy can contribute to macroeconomic stability and welfare by reducing the frequency of hitting the ZLB. Fiscal policy can also share the stabilisation role with monetary policy, whose effectiveness under the ZLB is much reduced.

We set up a two-region model to study the policy challenge of bringing the North’s income up to the level of the South in the UK. The model focuses on labour costs as the driver of output gains through the international competitiveness channel; and on tax/regulative costs to entrepreneurs as the driver of productivity growth. The empirical results show that the regional model behaviour fits the regional UK data behaviour over the period of 1986Q1 and 2019Q4, using the demanding Indirect Inference method. We also carry out a Monte Carlo power test, which shows the empirical results we obtain are trustworthy and can provide us a reliable guide for policy reform. The results suggest that in response to tax cuts and labour market reforms GDP in the North increases almost twice as much as GDP in the South. Given that a broad programme of tax cuts and regulatory reform would more than pay for itself in the long run, it must be considered as a highly attractive political agenda.

This paper analyses the effect of wealth inequality on UK economic growth in recent decades with a heterogeneous-agent growth model where agents can enhance individual productivity growth by undertaking entrepreneurship. The model assumes wealthy people are more able to afford the costs of entrepreneurship. Wealth concentration therefore stimulates entrepreneurship among the rich and so aggregate growth, whose fruits in turn are largely captured by the rich. This process creates a mechanism by which inequality and growth are correlated. The model is estimated and tested by Indirect Inference and is not rejected. Policy-makers face a trade-off between redistribution and growth.

The Thatcher reforms brought inflation under control and raised growth and living standards, by injecting competition into most areas of the economy. The recent banking crisis is not attributable to Big Bang but rather to the 1997 Labour government’s removal of supervisory powers from the Bank of England. The fact that most large continental economies have failed to achieve supply-side reform puts the Thatcher achievement in stark perspective

In the noise of the debate about the EU, it is rare for fundamental questions to be asked. For example, for what purposes should we have international institutions at all? Does the EU meet those purposes and, if not, is reform possible? This book considers these questions. An international team of renowned authors looks at each area of economic policy in which the EU has an interest, as well as at the governing structures of the EU, and asks what, if anything, the EU should be doing. In most cases, this is then compared with the status quo and against the possibility of Brexit in order to help the reader make a judgement, in each policy area, about which would be the best direction for Britain to take. As well as providing a fine contribution to the Brexit debate, the authors of this book provide a framework for evaluating the results of renegotiation together with a long-term programme for reform. The usefulness of this timely book will long outlive the referendum debate. The book asks - and answers - the fundamental questions that are rarely considered by the political classes.