ABSTRACT
Safeguarding the model’s quality also implies that new insights from economic theory be explored and, if relevant, incorporated into model development. Many of the smaller changes to MORKMON over the years should be seen against this background. One example is the modelling of hysteresis effects in the labour market which was introduced in MORKMON-II to replace the rather ad hoc modelling of wages in MORKMON-I (Blanchard and Summers, 1986). This example also highlights the more general argument that the interaction between model development and policy is difficult to disentangle from the impact of external trends and novelties in macroeconomic theory on model-building. Ultimately, however, these trends should perhaps be seen as policy driven to the extent that their intention is for models to become better equipped for policy use. The same holds for developments in econometrics. Error correction specifications were introduced when MORKMON-II replaced MORKMON-I. Through introducing equilibrium feedback, error correction formulations were helpful in improving the model’s dynamics while, at the same time, strengthening its economic-theoretical and longterm properties. This enhanced the applicability of the model for policy simulations over a longer horizon.
