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Economic Policy and the Performativity of Economic Models: Looking at the Intersection between Theory and Policy

This research project aims at analyzing the role of economic models in economic policy-making. Specifically, we investigate the impact of CGE models, related to the TTIP debate, and potential output models, related to fiscal policy in the EU, on political decision-making and public debate.

The alleged performativity of economic models – and the associated claim that “economists make markets” – has been studied in various contexts. A general finding in this literature is that economic models have a strong impact when it comes to institutional design and, hence, can have a significant influence on actual economic activities and conditions. By actively aiding the design of economically relevant institutions, economic theory also achieves a prime role in economic policy, where theoretical advice is often based on modified variants of standard economic models, specifically crafted for analyzing policy questions.

This research project analyzes the quality and impact of these kinds of “political consulting services” based on specific economic models. In particular, we analyze two cases of economic consulting via tailor-made theoretical models: the role of CGE-models in current debates on the TTIP, and the role of potential output models in national fiscal policy introduced to monitor compliance with the EU’s fiscal regulation framework.

With regard to these two cases, we focus on three separate research questions: first, we examine analytical preconceptions employed in the relevant models to identify theoretical assumptions, which prove to be crucial for interpreting the final results. Second, we explore how policy-makers and other actors included in the policy-making process, like journalists or administrative staff, interpret and apply the evidence or suggestions provided by those models within their own work. Third, we ask for the actual impact of the advice provided by tailor-made economic models and evaluate the alleged performative effect of economic theory in the two specific cases under study.

Project details

This project is funded by the Institute for New Economic Thinking (INET) under the grant number INO1500015.

Project lead

Jakob Kapeller
Philipp Heimberger
Bernhard Schütz