ECONOMETRIC IMPLICATIONS OF THE GOVERNMENT BUDGET CONSTRAINT

Despite Christ's (1968) warnings, modem macroeconometric models for po licy analysis still fail to treat the government budget constraint (GB C) adequately. I point out that the potential consequences of mistaken handling of the GBC become more severe as forward-looking behavior is incorporated in macroeconometric models. Furthermore, contrary to pop ular belief, careful treatment of the GBC is shown to be a matter of p rimary importance even in models of the short and medium term. (C) 199 8 Elsevier Science S.A.