By Brai Odion-Esene

WASHINGTON (MNI) – St. Louis Federal Reserve President James
Bullard Friday called more intense effort in developing broader economic
models, warning that current designs are not “sophisticated” enough to
handle future challenges in U.S. economic policy.

“The nation needs a more aggressive and better-funded research
effort in macroeconomics,” Bullard said, warning, “The current level of
effort is unlikely to meet the many challenges the U.S. faces going
forward.”

In remarks prepared for the International Research Forum on
Monetary Policy held at the Federal Reserve Board, Bullard noted that,
often, very key academic research has often been resisted by
policymakers.

“The backroom research has been brilliant … but has often
been resisted in the front room,” Bullard said.

Actual policy has been slow to adapt to suggestions from the
research frontier and tends to stick with policy adjustments which seem
to have worked well in the past, he said.

As a result, the Fed official said, “We are nowhere near where we
need to be in terms of having a useful, comprehensive macroeconomic
model that we can use to get the economy to perform at its peak level.”

He warned that, “Our current effort is not sophisticated enough to
handle the challenges that lie ahead. A more intensive national research
effort in macroeconomics is needed.”

Models should be expanded, he opined, and negative outcomes should
be kept as a possibility inside economic models, so that policy choices
can be evaluated with the very negative possibilities in mind.

“With small models, policymakers have to guess what the effects
might be on aspects of the economy outside the analysis,” Bullard said.
“Small, shortcut models are going to be wildly wrong on many
dimensions.”

On the subject of growth and human capital, Bullard said the pace
of long run growth is the most important aspect of economic performance.
“We should be analyzing stabilization policies in conjunction with
growth policies.”

Bullard argued that improved policy can deliver better outcomes —
perhaps even dramatically better — “even in a world in which the
forecastable component of real activity is small.”

He acknowledged, however, that “to put a satisfactory ,
comprehensive macroeconomic model together is a Herculean task.”

** Market News International Washington Bureau: 202-371-2121 **

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