Are Forecasting Models Usable for Policy Analysis?

Abstract

In one of early papers discribing the application of vector autoregression (VAR) models of economics, Thomas Sargent (1979) emphasized of that while such models were usefull for forecasting, they could not be used for policy analysis. Recently this point has been vigorously reasserted, by Sargent (1984)himself and by Edward Learner (1985) among others. The point has required vigirous reassertion because VAR modles are used widely, and few who used them stay pure - in the sense of never thinking about their implicaton for policy - for very long. There are several reasonable ways to generate conditionals for forecasts from VAR model.