| Sumario: | By their very nature, the analytic models that we use to teach macroeconomics to our students, and to organize our thinking about policy issues, are highly simplified. There is nothing wrong with leaving out of a model factors that are present in the real-world, provided that what is left out is, given the purpose of the model, unimportant relative to what is left in. One test of whether the appropriate selection has been made is to compare the predictions of the model with empirical evidence, but we impose this discipline on ourselves only sporadically when dealing with small analytic models. It is true that widely used components of such models, for example the aggregate demand for money function, have been subjected to empirical investigation. However, we do not usually test any small model as a whole against empirical evidence. <BR> At present, the student of the macroeconomics of inflation in open economies is confronted with a proliferation of competing, and often mutually inconsistent, models. It is our contention that empirical work is badly needed to bring some discipline to this area. In this paper, therefore, we construct a small-scale model that determines the behaviour of real income, prices, the balance of payments and the money supply in a fixed exchange rate open economy. We then subject the model as a whole to empirical testing against data drawn for the United Kingdom, and draw conclusions from that testing about which aspects of the model do appear to be consistent with the evidence and which do not. Thus we seek to make a threefold contribution. First, we present (yet another) small analytic model; second, we generate evidence about its empirical content; finally, and perhaps most important, we provide an example of how empirical work may be used to discipline and guide the process of model building even at a high degree of aggregation and abstraction.
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