Preface
This workbook can be used at a variety of levels. Chapter 1 contains introductory material. It presents the vocabulary of model building and covers the main issues that are involved in constructing and working with macroeconometric models. Chapter 2 is a review of the US model, and you should definitely look over this chapter before beginning to do the experiments. Some of the material in Chapter 2 is intermediate or advanced, but it can be easily skipped by introductory users.

The experiments begin in Chapter 3. The experiments in Chapter 3 are descriptive, and these can be very useful for introductory students. The experiments give students a feel for the data, especially for how variables change over time. All of Chapter 3 is introductory. Chapter 4 is also introductory; it contains descriptive experiments about the National Income and Product Accounts and the Flow of Funds Accounts.

The analysis begins in Chapter 5, where fiscal-policy effects are examined. This material is accessible to introductory students who have had the equivalent of the IS-LM model. (Although most introductory texts do not refer to the model that they are teaching as the "IS-LM" model, this is in fact the model that they are using.) The first two experiments pertain to changing government spending under two different assumptions about monetary policy. The rest of the experiments in this chapter pertain to changing other fiscal-policy variables, and this can be skipped by introductory users if desired.

Chapter 6 discusses monetary-policy effects, namely the effects of changing the short term interest rate, and again this material is accessible to those who have had the equivalent of the IS-LM model.

The first part of Chapter 7 discusses price shocks, and this material is accessible to those who have had the equivalent of the AS-AD model. The first two experiments concern changing the import price index, PIM, and these changes can be looked upon as shifts of the AS curve. Both of these experiments are good ways of showing how stagflation can arise. The second part of Chapter 7 examines wealth effects through stock market shocks, and this is intermediate material.

Chapter 8 is also intermediate material. It examines the effects on the economy of changing housing prices.

Chapters 9-13 are intermediate to advanced. Many of the experiments require changing coefficients in the equations and examining how the properties of the model differ for these changes. At the intermediate level this is an excellent way of getting students to have a deeper understanding of macroeconomic issues. The suggestions in Chapter 13 about imposing rational expectations on the model and making major changes to the model are for advanced users.

To summarize, the following is recommended for introductory users:

  1. Chapter 1 - read carefully
  2. Chapter 2 - look over and then use for reference purposes
  3. Chapter 3 - do all the experiments
  4. Chapter 4 - do all the experiments
  5. Chapter 5 - do at least the first two experiments
  6. Chapter 6 - do the experiment
  7. Chapter 7 - do the first two experiments

Everything in the workbook is accessible to intermediate users except perhaps for Sections 13.3 and 13.4.

The complete description of the US model is in Estimating How the Macroeconomy Works -- Fair (2004). The latest version of the model has been estimated through 2011:1. These estimates and the complete specification of the model are presented in The US Model Appendix A: July 31, 2011, which is an update of Appendix A in Fair (2004). See Changes to the US Model Since 2004 for the specification changes that have been made to the model from the version in Fair (2004).

The reference Fair (2004) should be read by those contemplating using the model for research. This reference may also be of interest to teachers who would like a deeper understanding of the model than can be obtained by reading Chapter 2 of this workbook. There are a number of experiments in Fair (2004) that may be of interest to discuss with advanced students.