Dáil Éireann debate -
Wednesday, 17 Apr 1991

Vol. 407 No. 1

Written Answers. - Economic Model.

Peter Barry

Question:

125 Mr. Barry asked the Minister for Finance if he will outline his views on the criticism of Central Bank economists who say that the economic model is unsuitable for policy simulation; and, if he accepts the criticism, if he will give details of the model which the Government propose to use in the future.

Minister for Finance (Mr. A. Reynolds)

I welcome informed debate on key issues, including that of the structure and capability of the economic model. Such models, however complex in design, are by definition a simplification of the real world; and for that reason must be continuously subject to a process of criticism and development. In this context, debate among concerned economists is to be welcomed.

The criticism referred to in the question arises from a paper presented to the Statistical and Social Inquiry Society of Ireland in February last, by two economists from the Central Bank expressing their personal views. In fact, their conclusion was rather more muted than the question implies. They actually said that "some people...might be tempted to suggest that the results presented (in their paper)...cast some doubt on the reliability of the HERMES model for forecasting and policy simulation". Their arguments, I understand, in the view of most participants in the lively academic debate that evening, do not call into question the merits of the model for policy formulation purposes.

As I have indicated, no model can be a perfect representation of the real world. But the model in question has met strict refereeing criteria. Key elements of it have been published in a most reputable economic journal, theEuropean Economic Review. It is part of an EC-wide system of national models and is regarded by the economists of the European Commission as satisfactory for analytical work on the Irish economy. The EC, indeed, has commissioned its primary authors for related developmental work on the basis of that satisfaction.

The HERMES model, as it stands, is a useful support to policy formulation. It will continue to be used within my Department in this context, but with due exercise of judgment and caution against mechanical interpretation of its output. My Department, in conjunction with the ESRI, will also continue to develop and improve the model as economic theory and our understanding of the complex Irish economy evolves.