Reformulating empirical macroeconometric modelling

The policy implications of estimated macroeconometric systems depend on the formulations of their equations, the methodology of empirical model select ion and evaluation, the techniques of policy analysis, and their forecast p erformance. Drawing on recent results in the theory of forecasting, we ques tion the role of rational expectations: criticize a common approach to test ing economic theories, show that impulse-response methods of evaluating pol icy are seriously flawed, and question the mechanistic derivation of foreca sts from econometric systems. In their place, we propose that expectations should be treated as instrumental to agents' decisions, discuss a powerful new approach to the empirical modelling of econometric relationships, offer viable alternatives to studying policy implications, and note modification s to forecasting devices that can enhance their robustness to unanticipated structural breaks.