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Understanding the Evolving Macroeconomy

Programme Information

SCIENTIFIC CONTEXT
Historical Involvement of the ESRC in Macroeconomics
New Priorities in Macroeconomic Research
Advances in Research on Economic Growth
Political Economy Models In Macroeconomic Research
Reference To Previous ESRC Programmes

PRACTICAL AND POLICY CONTEXT
Non-Academic Interest Groups Europe

RELEVANCE AND CONTRIBUTION TO ESRC THEMATIC PRIORITIES
Economic Performance and Development
Globalisation, Regions and Emerging Markets
Governance, Regulation and Accountability
Technology, People and Innovation

CONTRIBUTING DISCIPLINES AND RESEARCH AREAS


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SCIENTIFIC CONTEXT 

Historical Involvement of the ESRC in MacroeconomicsSince its inception in 1965, the ESRC has made a major financial contribution to theoretical and applied research in macroeconomics, to research on the UK economy and to the training of macroeconomists in the UK. Initially this support was entirely in response to individual research proposals. In recent years it has also been channelled through the Macroeconomic Modelling Consortium. This was partly in order to enable comparisons to be made between competing large applications, and partly to raise additional finance for macroeconomic research from some of the main users, notably the Treasury and the Bank of England. The result has been the development of a UK macroeconomic modelling programme of international renown. The Consortium programme made a substantial contribution to policy making in the UK by combining high quality academic research with the needs of policy makers and government and business forecasters. It has had a major effect on the way the Treasury and the Bank of England have monitored the economy and implemented policy. Current policy practice, such as the new methods of inflation control which combine macroeconometric knowledge with optimal control theory and game theory, is the product of twenty years of research and policy experience. The modelling groups associated with this Programme have also served as a major training ground for many prominent UK macroeconomists in academia, policy institutions and the private sector.

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New Priorities in Macroeconomic Research

Although there is still an important role for macroeconometric modelling in understanding and managing the economy, over time the perspective of what issues are relevant and how to research them has broadened considerably. The priorities of macroeconomics have changed with far less emphasis being placed on traditional large-scale macroeconometric modelling and more on the new theories and small-scale modelling. The focus has shifted to much smaller models that are better grounded in economic theory and tailored to specific policy and forecasting uses. The stress is now more on the logical connections between different parts of the economy, and different national economies, the causes of business cycles, how to achieve steady self-sustaining or endogenous growth, on inter-temporal considerations like savings, capital and debt accumulation and how to finance fiscal deficits. These models are also particularly suitable for policy analysis: monetary and fiscal policy and the macroeconomic consequences of welfare reform. Other factors affecting the decline in large-scale macro modelling are changes in computing technologies and the availability of data-bases on-line. These have meant that macroeconometric modelling can now be undertaken at much less expense by substantially smaller groups; large teams are no longer required.

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Advances in Research on Economic Growth

A further relevant development has been the important advances which have been made in research on economic growth and the consequent rise in the importance of research on this topic and, more generally, on the long-run economic performance of nations and regions. This is a very broad research topic covering a wide range of issues, including the role of capital accumulation in growth, the importance of technology, the sources of technological progress and innovation, the role of social institutions, the interaction between the domestic and international financial system and economic growth, the importance of education and training, whether economic performance converges across countries, the role of trade, the importance of industrial structure, the role of labour markets and the relationship between growth and unemployment. The potential importance and breadth of this research programme has been a prime motivating factor in the development of the Council's new Programme, although the very wide range of pertinent issues falling within this remit should be stressed.

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Political Economy Models In Macroeconomic Research
 
Another area of research that is attracting increasing attention is institutional arrangements, or more generally the governance of the economy in the form of a growing political economy or 'political economics' literature. This literature goes beyond the issue of what policies should be followed, to examine the issue of what kind of policy-making institutions and structures promote better policy outcomes. Some of the insights which political economy models have provided into aspects of monetary economics - such as the issue of central bank independence - are well known, but this literature has also recently begun to analyse other topics in macroeconomics such as growth and fiscal policy from a political economy perspective. This is a relatively new area in which a range of important relevant issues may be addressed. Although this literature is still in its infancy, the importance of the considerations it addresses is self-evident. The scope in this area for fruitful dialogue and joint research between different social science disciplines is obvious and goes far beyond earlier cross-disciplinary work on topics like political business cycles.

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Reference To Previous ESRC Programmes

The Programme builds on previous ESRC programmes in other disciplines, including research done under the ESRC's Whitehall programme; sociological and political research done under the CREST and BES programmes on the influence of policy on voting behaviour and public attitudes to fiscal policies; and on the nature, role and performance of international economic institutions under the Global Economic Institutions programme. The new Programme aims to benefit from some continuity with these previous programmes, which will have terminated before this Programme begins, whilst at the same time re-focusing the research.

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PRACTICAL AND POLICY CONTEXT 

Non-Academic Interest Groups

The Programme has been developed in consultation with major non-academic interest groups to help ensure its relevance to them. Foremost among these are HM Treasury, the Bank of England, and the CBI. Both the Treasury and the Bank have a strong and continuing interest in the underlying determinants of economic growth and the impact which policy may have on long-run growth performance, but they have also stressed their concern with new national and international institutional structures, the importance of international issues and the changing way in which economic analysis is used in the policy making process. As a consequence, they have also emphasised the need for original research on these new policy issues. For example, while the Bank continues to employ empirical models as an input into the process of setting interest rates by the Monetary Policy Committee, they no longer use just one model for this; instead the emphasis is on a variety of usually small models and competing methodologies. The aim is to achieve a degree of robustness in policy design, and for this diverse models and approaches are compared. Similar considerations apply to the Treasury's use of models.

The relevance of the new Programme is not confined to policy makers and academic researchers. Many research areas covered by the Programme (e.g. the impact of technology on economic activity, the location of economic activity) are of direct relevance to the private sector and the population at large. Also, issues such as understanding and predicting the business cycle and the way in which the structure of the economy evolves during the growth process are of fundamental interest to the private sector.

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Europe

The European dimension is a central feature of concern for government and business, and warrants special mention. The potential impact of European economic, institutional and political developments on the UK economy is great. A key aim of the Programme is to provide fundamental research on the consequences of economic, social and political developments in Europe, including increased EU economic integration and EMU, for the UK economy, for the formulation of economic policy and for institutional change.

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RELEVANCE AND CONTRIBUTION TO ESRC THEMATIC
PRIORITIES:

Economic Performance and Development

Economic growth, both in the short and the long run, the management of the economy and the appropriate institutional framework are central to economic performance and development. They are also at the heart of one of the major ESRC themes - "An economy that performs well will create wealth and improve the quality of life of its citizens. It is vital to identify the key factors and to understand the processes that determine economic performance."

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Globalisation, Regions and Emerging Markets

By studying the experience of other countries much can be learned about UK economic performance. In addition, studying the development of trade patterns and international markets should be useful for analysing current UK corporate performance.
 

Governance, Regulation and Accountability

A successful economic policy requires the right institutions, regulatory controls and credibility. Such considerations have been at the heart of many recent economic reforms and raise the issue of the relationship between democracy and economic policy making.

Technology, People and Innovation

Productivity improvements, and hence economic growth, will form a central part of this research.

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CONTRIBUTING DISCIPLINES AND RESEARCH AREAS

While the macroeconomic research community may be expected to play a significant role in carrying out the research under the Programme, it will be accessible to a broad range of disciplines. Funds will be allocated on intellectual quality rather than reserved for particular methodologies or disciplines. The new Programme offers opportunity for novel multidisciplinary research and interdisciplinary teams are encouraged to apply. As well as broadening the scope of macroeconomic research to other disciplines, this Programme invites contributions from a wider segment of the UK economics profession than previous macromodelling programmes.

The theme of Economic Growth and Fluctuations offers considerable scope for the involvement of economic historians in producing and analysing the data, along with political scientists and sociologists. Most previous work has used cross-country growth regressions: time series and panel data analyses have not been used to a large extent. Enormous contributions in time series econometrics, funded by the ESRC, places UK researchers in a particularly strong position to fill the gap. Recent research in understanding economic growth has brought about increased collaboration between economists, economic historians, political economists and scientists, geographers, sociologists and other social scientists, and the Programme will encourage this. The theme of Economic Policy: Design, Governance and Practice with its emphasis on institutional and policy design and performance offers considerable scope for the involvement of political scientists, sociologists and psychologists and for their interaction with economists