Contemporary Application of Economic Theory (proposal) - Research Paper Example

Contemporary Application of Economic Theory (proposal) Problem ment and Research Aim The application of modern economic theory permits economists to take a lot of economic decisions that affect the day to day running of financial and economic institutions. The Bank of England has taken advantage of existing economic theories to come out with what it refers to as Suite of Statistical Forecasting. This is a model that permits the bank to provide “judgement-free statistical forecasts of inflation and output growth as inputs into the forecasting process, and to offer measures of relevant news in the data” (Kapetanios G, Labhard V and Price S, 2007).

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.Research Questions Collection of primary and secondary data shall be conducted based on the following research questions:1. What are the components of the ‘suite of statistical forecasting models’ used by the Bank of England?2. How has the ‘suite of statistical forecasting models’ affected economic policy making in England’s general economy?3. What is the way forward for the ‘suite of statistical forecasting models’ in practice at the Bank of England and how can this be replicated in other banks?

Literature Review and Theoretical Framework 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:Components of the ‘suite of statistical forecasting models’ used by the Bank of EnglandThe ‘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 “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.

Impact of the Model on economic policy making in England’s general economyThe 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), “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. 772). The way forward for the ‘suite of statistical forecasting models’ in practice.

In order to maintain the credibility of the model, it is important for the Bank to distinguish between forecasts made sorely by the Suite and that made with the aid of the Bank of England Quarterly Model (BEQM). Again, measures must be put in place to filter the disparate outputs in an informative way since there currently exist several competing models, seeking to achieve the same end. (Kapetanios G, Labhard V and Price S, 2007, p. 773)Research Design and Sample SizeThe research design to be employed for this research will be a case study.

Soy (2006) explains that “Case studies emphasize detailed contextual analysis of a limited number of events or conditions and their relationships.” To this effect, the Bank of England shall be set as the reference point for this research. The sample size shall be selected based on purposive random sampling to ensure that the right people with the right data are selected for the research. Data Collection Procedure and Data Analysis PlanThere shall be two major data collection procedures. These will be primary and secondary data collection procedures.

With primary data collection, authentic documentations from the financial accounts and records of the bank shall be analyzed with permission from the bank. Data shall be analyzed by both qualitative and quantitative procedure. Qualitative data analysis shall enable the researcher to give personal judgment to data collected. Quantitative data analysis shall however involve the use of mathematical formulae, charts, diagrams and calculations. Quantitative data analysis shall present a universal representation of facts.

Conclusion This research if completed will open the way to improved application of modern and contemporary economic theories. Findings are hoped to be benchmarks on which other financial institutions are going to expect successes operate their own models.REFERENCE LISTGintis H., 2005, ‘Behavioural Game Theory and Contemporary Economic Theory’ accessed August 24, 2011 Stock, J.H., Watson, M.W., 2007. Why has U.S. inflation become harder to forecast? Journal of Money, Credit and Banking 39, 3–33.

Kapetanios G, Labhard V and Price S, 2007, ‘Forecast combination and the Bank of Englands suite of statistical forecasting models’, Economic Modelling 25 (2008) 772–792: Elsevier B.V. Available online at www.sciencedirect.com