ABSTRACT
By their very nature, economic models abstract from important aspects of reality. (If models did not employ a degree of abstraction, they would not be models.) And yet, if economists hope to have credibility with each other and with the non-economist majority of the population, it is important that our models not be too far-fetched. The problem of credibility is especially acute for applied general-equilibrium modellers. This is because, by definition, we are dealing with models that are sufficiently complex that they are not amenable to analytical solutions. Thus, we produce results that cannot easily be replicated by other researchers. To the rest of the economics profession and to the rest of the world, it may appear that our results come from a mysterious ‘black box’. Some may take the output of the black box on faith, but others may not. Faith, once lost, is not easily restored. Over the last generation, economists have used a great variety of general-equilibrium simulation models to analyse the effects of tax-policy changes. These include static models, models with overlapping generations of life-cycle consumers, and models in which the consumers have an infinite horizon.
