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QUEST was designed to analyse the economies in the member states of the European Union
and their interactions with the rest of the world, especially with the United States and Japan.
The focus of the model is on the transmission of the effects of economic policy both on the
domestic and the international economy. The model was primarily constructed to serve as a
tool for policy simulation; less emphasis was put on its ability to serve as a forecasting tool.
Given the wide coverage of the model it must necessarily be highly aggregated. A high
degree of aggregation and foundation of the specification in current macroeconomic theory
also helps in interpreting and understanding the results of the simulations. Finally simplicity
also facilitates the solution of the model and reduces the time and memory requirements of
the computer-simulations. The new model contains structural models for the EU member
states, the US and Japan and distinguishes 10 additional countries/regions in trade feedback
models in order to model trade interactions with the rest of the world.
Compared to the former version of the QUEST model, which was presented in European
Economy No. 47 (1991), the new model is now considerably modified with respect to its
theoretical structure. The previous version of QUEST was deeply rooted in the Keynesian
tradition of econometric model building, strongly stressing the demand side of the economy
and modelling consumer and investment behaviour in a backward looking fashion. In the
new version an attempt was made to base the behavioural equations more strongly on
principles of dynamic optimisation of private households and firms. That makes the model
substantially more forward looking. Also the supply side is now more explicitly modelled.
The present model is also closed with respect to stock-flow interactions. Those stock
variables which can be identified on a macroeconomic level such as physical capital, net
foreign assets, money and government debt are endogenously determined and wealth effects
are allowed to influence savings, production and investment decisions of private
households, firms and the government. Moreover, financial linkages between national
economies are now more explicitly modelled. In the current version it is assumed that assets
determined in different currencies are perfect substitutes - up to an exogenous risk
premium. Consistent modelling of international trade and financial linkages also require
that at each instant two adding-up constraints hold: trade balances and net foreign asset
positions sum to zero. Also the long run properties of the model are now systematically
explored.
Apart from simulations related to the Commission’s short and medium term projections, the
model has been intensively used to analyse the impact of the Maastricht criteria on growth
and employment and the long run effects of fiscal consolidation and structural reforms in
Europe (e.g. Bayar et al., 1997a). Related to this, the model was used to study the impact of
monetary policy on the success of government expenditure cuts (Roeger and in ’t Veld,
1997a), and the macroeconomic effects of various tax reforms (Roeger and in ’t Veld,
1997b) and VAT harmonisation (Bayar, Roeger and in ’t Veld, 1997). The model has also
been used to assess the employment and growth effects of the Trans European Transport
Networks (European Commission, 1996), while the models for Greece, Ireland, Portugal
and Spain have been used to look at the macroeconomic effects of the Structural Funds
(Roeger, 1996b).