CoPS/IMPACT Working Paper Number IP-56

Title: Using the Murphy Model to Provide Short-Run Macroeconomic Closure for ORANI

Authors: James H. Breece, Keith R. McLaren, Chris W. Murphy and Alan A. Powell


A macro model incorporating rational expectations in financial markets (the Murphy Model - MM) is used to endogenize the macroeconomic environment for a comprehensive general equilibrium model (ORANI). The interface exploits the existence of variables which are endogenous to both models, calibrating on a shock to government spending, which is the principal common exogeneity. The responses of the half-dozen doubly endogenous variables feature prominently in the calibration procedure, which minimizes any conflict between the stories told about these variables by the two models. Prospective benefits include:
(1) to the numerous policy-oriented users of ORANI, a facility allowing the macroeconomic environment to be determined by a macrodynamic model such as MM;
(2) to these users, reassurance that ORANI's short-run translates in calendar time to about two years;
(3) to the clientele of a macro model, the possibility of much more detailed projections..

JEL classification: C68, E17

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