Don Harding and Adrian Pagan
- Published in print:
- 2016
- Published Online:
- January 2018
- ISBN:
- 9780691167084
- eISBN:
- 9781400880935
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691167084.003.0008
- Subject:
- Economics and Finance, Econometrics
This chapter looks at using the binary states describing the recurrent events to help in either constructing economic models of time series or evaluating the fit of such models. The chapter provides ...
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This chapter looks at using the binary states describing the recurrent events to help in either constructing economic models of time series or evaluating the fit of such models. The chapter provides a general discussion of the issues that come up when using the binary states in regressions. It then turns to the analysis of complete economic models. In these it is very common to see variance decompositions computed and used to draw conclusions about which shocks are responsible for the recurrent events. It is shown that this methodology is flawed when it comes to shedding light on what causes the business cycle. What can be done is investigated in the chapter, which illustrates how to determine which shocks are important to a matching of the business cycle features discussed in Chapter 5. The discussion moves on to some economic models that have been constructed in the wake of the global financial crisis and which aim to highlight the role of financial shocks.Less
This chapter looks at using the binary states describing the recurrent events to help in either constructing economic models of time series or evaluating the fit of such models. The chapter provides a general discussion of the issues that come up when using the binary states in regressions. It then turns to the analysis of complete economic models. In these it is very common to see variance decompositions computed and used to draw conclusions about which shocks are responsible for the recurrent events. It is shown that this methodology is flawed when it comes to shedding light on what causes the business cycle. What can be done is investigated in the chapter, which illustrates how to determine which shocks are important to a matching of the business cycle features discussed in Chapter 5. The discussion moves on to some economic models that have been constructed in the wake of the global financial crisis and which aim to highlight the role of financial shocks.
