How do governments around the world model the economy?

Question

In the media (in my country at least) when they report on policy that will affect the economy I have often heard the phrase "treasury modelling". I assume this means they model the economy to predict what impact the policy will have and (one would hope) refine policy details.

What methods do they use and why are they chosen?

I'm particularly interested in Australia, but I'm keen to hear what other countries do, for instance the USA and China.

_{I'm not sure where to ask this question. I considered PF&M, but I don't know if it fits there. Please move if appropriate}

Answer 1

What methods do economic modellers use?

From an introductory article published by the International Monetary Fund (IMF):

An economic model is a simplified description of reality, designed to yield hypotheses about economic behavior that can be tested. [...]

Economic models generally consist of a set of mathematical equations that describe a theory of economic behavior. The aim of model builders is to include enough equations to provide useful clues about how rational agents behave or how an economy works.

How do governments choose economic modellers?

People with expertise in economic modelling may be employed directly by a government institution, such as the finance ministry or central bank. Governments may also consult external experts, for example in:

• The university sector

• Independent research institutes

• Commercial institutions such as banks or investment funds

• International institutions such as the IMF or World Bank

In the case of Australia, the government department known as the Treasury reformed its economic modelling strategy in 2016:

In response to a review of its macroeconomic forecasting methodology, Treasury undertook to develop a wider range of alternative techniques to forecast the economy and to convene an external panel of experts to provide advice on those alternatives.

The expert panel provides advice on technical macroeconomic and forecasting issues. The members are academics and other macroeconomic experts with specialist knowledge in macroeconomic modelling.

Treasury is also making a determined effort to build its macroeconomic and modelling capacity recruiting staff with extensive macroeconomic and modelling experience.

Answer 2

There can be several methods used. Pen and paper if you're old school. Nowdays I would guess either computer spreadsheets or dedicated software is probably used. In 1949 there was the MONIAC (Monetary National Income Analogue Computer), aka Phillips Hydraulic Computer or Financephalograph. It was actually an analogue computer that used water to represent money.