Econometrics and economic policy

This is a survey paper on five important developments in econometrics, with illustrative applications to economic policy formulation in Taiwan, Mainla nd China and the United States. The developments axe the endogeneity of exp lanatory variables in a stochastic equation, nonstationarity of dynamic mod els in the form of cointegrated variables, the determination of optimal pol icies, accounting for reactions of economic agents to changing policy rules , and the use of conditional expectations to capture forward looking behavi or.