Staff Report 49

The CBO’s Policy Analysis: An Unquestionable Misuse of a Questionable Theory

Arthur J. Rolnick | Senior Vice President and Director of Research, 1985-2010
Preston J. Miller | Former Vice President and Monetary Adviser

Revised November 1, 1979

The analyses of fiscal and monetary policies that the Congressional Budget Office (CBO) provides Congress tend to be biased, encouraging the use of activist stabilization policies. The CBO’s virtual neglect of economic uncertainties and its emphasis on very short time horizons make active policies appear much more attractive than its own model implies. Moreover, the CBO’s adoption of the macroeconometric approach fundamentally biases its analyses. Macroeconometric models do not remain invariant to changes in policy rules and are mute on the implications of alternative policies for efficiency and income distribution. The rational expectations equilibrium approach overcomes these difficulties and implies that less activist and less inflationary policies are desirable.

Published In: Journal of Monetary Economics (Vol. 6, No. 2, April 1980, pp. 171-198)

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