Contemporary Application of Economic Theory (proposal) Research Paper

Contemporary Application of Economic Theory (proposal) - Research Paper Example This research shall seek to scrutinize the validity of the model and assess how the model has succeeded over the years in fetching the economic environment of England with reliable economic predictions, based on which economic policy analysis of England can be attributed to. The literature review and theoretical framework of this research work shall be built purposely around the research questions. To this effect, there shall be three major themes which will be looked at. These themes have briefly been discussed below: The ‘suite of statistical forecasting models’ used by the Bank of England was born out of behavioural game theory. Behavioural game theory has been lowered by economists to mean the empirical determination of â€Å"how individuals make choices under conditions of uncertainty and strategic interaction† (Gintis, 2005). It is based on clues of how people make choices under uncertainty and strategic interaction that the Bank comes out with its forecasts of inflation and output growth as inputs into the forecasting process (Kapetanios G, Labhard V and Price S, 2007). Major components of the model include simple linear autoregressive (AR) models, information from existing history, univariate non-linear models, more information from extra variables, Linear vector-autoregressions (VARs), and use of Bayesian techniques. The major and most outstanding impact of the model on economic policy making in England’s economy is that the model has succeeded in coming out with reliable forecast for decision making on inflation and other macroeconomic variables. This is not without the challenge of dealing with the unconditional mean but as noted by Stock and Watson (2007), â€Å"the well-documented move towards macroeconomic stability, sometimes referred to as the ‘Great Stability’, has made forecasting more easy in the sense that macroeconomic variables stray less far from the unconditional mean† (Kapetanios G, Labhard V and Price S, 2007, p.