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Structural Econometric Models

Structural Econometric Macromodels (SEMs) have been largely replaced by VARs and SDGE models in the academic literature, but they remain central to much of the analysis undertaken by policy institutions. (For a discussion of these trends, see Wren-Lewis(2000). (bookearlier version)) In 1998/9 I provided advice to the Bank of England on the development of their first published model post independence (see Wren-Lewis (1999) (articleearlier version) ), and from 2000 to 2003 I continued to advise them on the development of BEQM, which they used until recently to forecast the UK economy

In the 1990s I built a new UK SEM, called COMPACT, with in particular Julia Darby and John Ireland. The aim of this model was to incorporate new theoretical advances into a UK econometric model, with a focus on policy analysis rather than forecasting. The emphasis on theoretical system properties is reflected in the technique of theoretical deconstruction, which Wren-Lewis et al (1996) argues should be an essential part of SEM evaluation. The COMPACT model is described in detail in Darby et al (1999) 
(articleearlier version). Jacobs and Wallis (2005) present an interesting comparison of COMPACT with the 'structural VAR' model built by Pesaran and his colleagues.

COMPACT has been recently used in Keogh-Brown et al (2009) 
(articleworking paper) to examine the macroeconomic impact of a flu pandemic on the UK. Although results clearly depend on the severity of the pandemic, two key results emerge. First, as long as the number of deaths are not significant, the economic costs are short term. Second, these short term effects could be very large if there is large scale avoidance of social contact during its duration.

The latest COMPACT Model Manual is in the form of a rich text file designed to run as an old windows help file (see Compact5.rtf below). The model (along with some of the models in my academic papers cited above) is solved using my own model solution software, MODELPHI, which is a Windows programme developed using Borland's DELPHI. (The rich text file explaining how to use Modelphi is also below.) This software is not a commercial product, and was designed for my own use. However it has been used by others, including students. Anyone interested in using MODELPHI should contact me by email.


Darby, J, Ireland, J, Leith, C and Wren-Lewis, S (1999), Compact: A Rational Expectations, Intertemporal Model of the United Kingdom Economy, Economic Modelling, 16,1-52 (article, earlier version)

Jacobs, J.P.A.M. and Wallis, K.F. (2005), Comparing SVARs and SEMs: Two Models of the UK Economy, Journal of Applied Econometrics, 20, 209-228

Keogh-Brown, Marcus, Wren-Lewis, Simon, Edmunds, John, Smith, Richard (2010), The possible macroeconomic impact on the UK of an influenza pandemic, Health Economics 19: 1345–1360
 (articleworking paper) 

Wren-Lewis,S. (1999), Many Models at the Bank of England, London Business School Economic Outlook, 23,17-21 (article, earlier version)

Wren-Lewis, S (2000), The decline in macroeconomic modelling, in Public Policy for the 21st Century, ed(s) Neil Fraser and John Hills, The Policy Press (book, earlier version)

Wren-Lewis, S., Darby, J., Ireland, J. and Ricchi, O. (1996), The Macroeconomic Effects of Fiscal Policy:Linking an econometric model with theory, Economic Journal, 106,543-559
Simon Wren-Lewis,
Aug 15, 2012, 2:58 PM
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Simon Wren-Lewis,
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