An obvious extension to the model that would produce results intermediate to those arising under either extreme assumption is to add one or more countries to the model. Indeed, adding a large number of countries would permit the consideration of trade policy as well as monetary and fiscal policy integration.
Adding Idiosyncratic Uncertainty
A final area for future work is adding idiosyncratic uncertainty to the model along the lines of Huang, et. al. (1997). Three types of uncertainty immediately come to mind — wage rate uncertainty, lifespan uncertainty, and workspan uncertainty. The introduction of dynamic programming to the model is, of course, critically important for addressing these issues. By making uncertainty idiosyncratic, one avoids aggregate uncertainty which would dramatically increase the dimension of the computational problem comments.
The A-К Model has come a long way from the simple prototype Alan Auerbach and I developed in 1980 in my apartment on a machine which would now appear in a computer museum. It now features intragenerational heterogeneity, does its work in minutes rather than hours, and will shortly feature demographics, begin its simulations from non steady-state positions, and use dynamic programming in solving for micro behavior. Other improvements, like adding money, multiple goods, and idiosyncratic uncertainty, are planned for the near term.
Each improvement increases the model’s capacity to study economic policy. But it also makes the model more complex and more of a “black box,” particularly to those who are unfamiliar with the various ways of checking the model’s specification and predictions. There is no way around this problem except for those using the model to raise comfort levels by providing more detail on their specification checks and as much intuition as possible about their results. The alternative — using very simple models that can be manipulated with the calculus – is helpful in building intuition about the sign of various policy effects, but unsatisfactory for obtaining a quantitative assessment of how and when actual policy changes will affect actual economies.
The other major challenge for the A-К Model, besides improving its capacities, is to bring it “in house” to policy-making institutions around the world. As mentioned, the model is being used by the Congressional Budget Office. It has also been used by economists at the World Bank and the OECD. But the model can and should be used much more routinely and much more broadly in the U.S. and abroad. It can and should be used not just by fiscal authorities, but by monetary authorities as well to study how their policies will affect inflation and alleviate or tighten fiscal constraints. The systematic use of the model and incorporation Г its findings into policy debates will force policy makers to confront the long-term implications of their decisions, distinguish cosmetic from real reform, and acknowledge that genuine long-term economic gain generally requires genuine shortterm economic sacrifice.