THE MACROECONOMIC EFFECTS OF FISCAL-POLICY - LINKING AN ECONOMETRIC-MODEL WITH THEORY

In this paper we outline a method, termed 'theoretical deconstruction' , which allows the system properties of any econometric macromodel to be related to a simpler theoretical model. First, elements of the econ ometric model which involve significant additional theoretical complex ity compared to the theory model are removed. This process continues u ntil the properties of the 'deconstructed' econometric model match tho se of the reference theory. Second, the econometric model is gradually reconstructed, noting at each point how each element of additional co mplexity influences the model properties. The technique is illustrated using fiscal policy changes and the UK econometric model COMPACT.