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Macroeconometric modelling: Alternative approaches

Anthony Garratt, Kevin Lee, M. Hashem Pesaran, and Yongcheol Shin

in Global and National Macroeconometric Modelling: A Long-Run Structural Approach

This chapter describes some alternative approaches to macroeconometric modelling, focusing on the long-run characteristics of macroeconomic models and the consensus that has developed surrounding ... More

This chapter describes some alternative approaches to macroeconometric modelling, focusing on the long-run characteristics of macroeconomic models and the consensus that has developed surrounding desirable long-run properties. It also considers the effectiveness of the different approaches in their attempts to test and incorporate the long-run properties into models in practice.Less

A long-run structural model of the UK

Anthony Garratt, Kevin Lee, M. Hashem Pesaran, and Yongcheol Shin

in Global and National Macroeconometric Modelling: A Long-Run Structural Approach

This chapter describes the empirical work underlying the construction of the UK model, discusses the results obtained from testing its long-run properties, and compares the model with benchmark ... More

This chapter describes the empirical work underlying the construction of the UK model, discusses the results obtained from testing its long-run properties, and compares the model with benchmark univariate models of the variables. The description of the modelling work not only provides one of the first examples of the use of the long-run structural cointegrating VAR techniques in an applied context, but it also includes a discussion of bootstrap experiments designed to investigate the small-sample properties of the tests employed.Less

Economic Models

John Kay

in The Business of Economics

Building bigger and more elaborate models will neither help us arrive at more realistic descriptions of the world nor help make our predictions more accurate. Mathematical models are just a more ... More

Building bigger and more elaborate models will neither help us arrive at more realistic descriptions of the world nor help make our predictions more accurate. Mathematical models are just a more accurate way of describing certain complex systems and even though such a model can enhance our understanding of the problem and help us check the internal consistency of our assumptions, it will not tell us something we have not already told it.Less

Comparing Macroeconomic Model Forecasts under Common Assumptions

Stephen K. McNees

in Comparative Performance of U.S. Econometric Models

Economic forecasts differ because forecasters use different macroeconomic models. However, even if everyone used the same model, all forecasts would not be identical. Most forecasts reflect a complex ... More

Economic forecasts differ because forecasters use different macroeconomic models. However, even if everyone used the same model, all forecasts would not be identical. Most forecasts reflect a complex interaction among three elements. Unfortunately, little is known about the relative importance of these elements. This chapter addresses three kinds of question. The initial stage of the Model Comparison Seminar's project, starting in early 1986, has been the collection of relevant data, a laborious and time-consuming part of the project. The following results are a preliminary report on an ongoing effort. The conclusions, based on the limited experience so far, must be regarded as highly tentative. Any success that has been achieved should be largely credited to the modelers who participated in this exercise. This chapter compares model solutions based on different sets of conditioning information. In general, a model can be thought of as a conditional statement about the relationship between inputs (Xs) and outputs (Ys), or Y = f(X).Less

The Failures of Forecasting

John Kay

in The Business of Economics

Using data on previous forecasts, this widely influential 1995 FT article criticizes the reliability and usefulness of economic forecasts. Contrary to the widespread belief that economists always ... More

Using data on previous forecasts, this widely influential 1995 FT article criticizes the reliability and usefulness of economic forecasts. Contrary to the widespread belief that economists always disagree, it shows that economic forecasts typically fall into quite a narrow range, but that the range rarely includes the outcome.Less

Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates

Hans Dewachter and Marco Lyrio

in Asset Prices and Monetary Policy

This chapter builds and estimates a macroeconomic model that includes learning. Learning was introduced in the model by assuming that agents do not believe in time-invariant inflation targets nor in ... More

This chapter builds and estimates a macroeconomic model that includes learning. Learning was introduced in the model by assuming that agents do not believe in time-invariant inflation targets nor in constant equilibrium real rates. Given these priors, the optimal learning rule was derived in terms of a Kalman gain updating rule. The results show that including learning improves the fit of the model independently of the type of information included in the measurement equation. Although learning models improve on the rational expectations models, they are not fully satisfactory. Autocorrelation in the errors was found to be significant. Introducing learning in a standard New Keynesian model generated sufficiently volatile stochastic endpoints to fit the variation in long-maturity yields and in surveys of inflation expectations. The learning model, therefore, complements the current macrofinance literature linking macroeconomic and term structure dynamics.Less

Short-Run Models of Contrasting Natural Resource Endowments

S. Mansoob. Murshed

in Resource Abundance and Economic Development

This chapter examines the links between natural resources, economic growth, and economic policy using a short-run theoretical macroeconomic model of a small open economy endowed with a natural ... More

This chapter examines the links between natural resources, economic growth, and economic policy using a short-run theoretical macroeconomic model of a small open economy endowed with a natural resource exporting sector. It considers the short-run effects of resource booms, devaluation, and a consumption tax on the non-traded good. Typologies are developed, distinguishing between the East Asian (diffuse resource-rich) and Latin American (point-source linkages) cases.Less

A Comparison of the Michigan and Fair Models

Ray C. Fair and Lewis S. Alexander

in Comparative Performance of U.S. Econometric Models

This chapter compares the predictive accuracy of the Michigan and Fair econometric models using the method developed in Ray Fair. These models are compared to each other and to an eighth-order ... More

This chapter compares the predictive accuracy of the Michigan and Fair econometric models using the method developed in Ray Fair. These models are compared to each other and to an eighth-order autoregressive model. The method accounts for the four main sources of uncertainty of an economic forecast: uncertainty due to the error terms, the coefficient estimates, the exogenous variables, and the possible misspecification of the model. Because it accounts for these four sources, it can be used to make comparisons across models. The method has been used to compare the Fair model to autoregressive models, vector autoregressive models, Thomas Sargent's classical macroeconomic model, and a small linear model, but this is the first time it has been used to compare two relatively large structural models. The chapter's primary aim is to demonstrate the application of the comparison method to large models.Less

Beyond a formal approach?: Seeking adequate policy analysis in Japan

Sukehiro Hosono

in Policy analysis in Japan

Formal policy analysis including cost-benefit analysis and quantitative policy equation system such as macroeconomic simulation model can be expected to be a strong and high performing analytical ... More

Formal policy analysis including cost-benefit analysis and quantitative policy equation system such as macroeconomic simulation model can be expected to be a strong and high performing analytical tool for a long time in developed countries. Cost-benefit analysis has been widely utilized with minor importance, but other formal approaches especially macroeconomic modelling and simulation have only had a narrow role for policy formation or policy making process in Japan. This paper considers the reasons why such formal analysis has been only restricted to exploit in policy making process from economic, political and historical points of view, and suggests making use of formal policy analysis more especially macroeconomic model approach with the Cabinet real coordination and international practical cooperation in order to fix public finance failure and to increase transparency of policy formation process in Japan.Less

Uses and Abuses of Economics

John Kay

in The Business of Economics

The first part of this chapter explains why economics has enjoyed more success in answering microeconomic questions rather than macroeconomic ones. The second part responds to a number of attacks on ... More

The first part of this chapter explains why economics has enjoyed more success in answering microeconomic questions rather than macroeconomic ones. The second part responds to a number of attacks on economics, by clarifying that the foremost role of economics is to clarify our understanding and organize our thoughts rather than to help us make forecasts.Less

Mathematical Models behind the Five Year Plans

K. L. Datta

in Growth and Development Planning in India

Mathematical models have been used to spell out development priorities and determine sectoral growth profiles in the Five Year Plans. The models used in the pre-reform period belong to the family of ... More

Mathematical models have been used to spell out development priorities and determine sectoral growth profiles in the Five Year Plans. The models used in the pre-reform period belong to the family of growth and investment model. This chapter discusses the basic features of the Mahalanobis model, which was used in the Second Plan, and describes the manner in which input–output based consistency models were used in the Fifth to the Eighth Plans. It gives an overview of the macroeconomic model and input–output model used in Plan formulation in the period of economic reform. The idea is to enable the general readers to be acquinted with the manner and method of employing these models in different stages of Plan formulation, and to understand how intuitively the targets in different areas and sectors of the economy are fixed.Less

Introduction: An overview of the GVAR approach and the handbook

Filippo di Mauro and M. Hashem Pesaran

in The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis

The world economies are tightly interlinked, via a complex net of transmission channels, which are however hard to model empirically. The GVAR, a VAR based model of the global economy, offers a ... More

The world economies are tightly interlinked, via a complex net of transmission channels, which are however hard to model empirically. The GVAR, a VAR based model of the global economy, offers a solution to the so called "curse of dimensionality", i.e. the existence of too many parameters to be estimated with respect to the available observations. This volume presents - for a first time in a compact and rather easy to read format - principles and structure of the basic GVAR model and a number of its many applications and extensions developed in the last few years by a growing literature. Its main objective is to show how powerful the model can be as a tool for forecasting and scenario analysis. The clear modelling structure of the GVAR appeals to policy makers and practitioners as shown by its growing use among major institutions, as well as by econometricians, as shown by the main extensions and applicationsLess

The basic GVAR DdPS model

Filippo di Mauro and L. Vanessa Smith

in The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis

This chapter provides a brief overview of the GVAR modelling framework and presents the basic GVAR model of Dees, di Mauro, Pesaran, and Smith (2007, DdPS). The DdPS GVAR model is estimated for 26 ... More

This chapter provides a brief overview of the GVAR modelling framework and presents the basic GVAR model of Dees, di Mauro, Pesaran, and Smith (2007, DdPS). The DdPS GVAR model is estimated for 26 countries/regions (the euro area being treated as a single economy) covering the period 1979 to 2011, thus extending the original estimation sample of DdPS by eight years. The emphasis is on the short-term and long-term implications of external shocks for a set of focus economies, namely USA, Euro area, China, Japan, UK, Sweden, Switzerland and Norway. The results among other suggest that financial shocks are transmitted relatively rapidly, and often get amplified as they travel from the USA to the rest of the world.Less

Conclusion

Filippo di Mauro and M. Hashem Pesaran

in The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis

Some of the main findings of the book include: Cross-border financial spill-overs are particularly important, not only during the 2007-09 crises but more generally, in transmitting financial and real ... More

Some of the main findings of the book include: Cross-border financial spill-overs are particularly important, not only during the 2007-09 crises but more generally, in transmitting financial and real shocks across the different regions. US credit supply shocks are found to have strong effects on a range of real and financial variables not only in the US, but also in many other economies. GVAR forecasts are found to perform better than a number of benchmarks, especially for output, inflation and real equity prices. The GVAR approach is particularly relevant in stress-testing exercises. The GVAR approach can be readily adapted to allow for non-linear dynamics. The GVAR model it has proved useful to quantify the effects of China’s emergence in the world economy. The GVAR can provide valuable insights into shock transmission across regions within a given economy with important lessons for regional policy.Less

Market Socialism or Capitalism?: The Transnational Critique of Neoclassical Economics and the Transitions of 1989

in Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism

This chapter focuses on the period from the 1970s to 1989, a time when neoclassical economists around the world felt that something was wrong with their field and began to criticize themselves ... More

This chapter focuses on the period from the 1970s to 1989, a time when neoclassical economists around the world felt that something was wrong with their field and began to criticize themselves despite gaining new forms of political and social influence. Many neoclassical economists saw 1989 as the end of the Soviet Union's state socialism, which they had opposed for so long, and the realization of market socialism. This chapter looks at the transnational critique of neoclassical economics and the transitions of 1989, focusing on criticisms in Hungary, Yugoslavia, and the United States. It looks at how mainstream neoclassical economists used socialisms for macroeconomic modeling, considers the notion of the “representative agent” or “social planner,” and neoclassical economics within the World Bank.Less

The Great Inflation: Did the Shadow Know Better?

William Poole, Robert H. Rasche, and David C. Wheelock

in The Great Inflation: The Rebirth of Modern Central Banking

The Shadow Open Market Committee (SOMC) was established in 1973 in response to rising inflation in the United States and the apparent failure of either the Nixon administration or the Federal Reserve ... More

The Shadow Open Market Committee (SOMC) was established in 1973 in response to rising inflation in the United States and the apparent failure of either the Nixon administration or the Federal Reserve to formulate effective policies to control inflation. This chapter describes the monetary policy framework of the SOMC and the statements it issued during the Great Inflation period. It simulates a New Keynesian macroeconomic model embedding a representation of the SOMC policy rule to evaluate whether the committee’s proposals could have resulted in a lower average and more stable rate of inflation than actually occurred. The simulations show that a gradual adjustment of money stock growth similar to that advocated by the SOMC is likely to result in less impact on output growth and less variability in inflation or output growth than a large one-time adjustment.Less

Economics of Climate Change

Bradly J. Condon and Tapen Sinha

in The Role of Climate Change in Global Economic Governance

This chapter applies the concepts of environmental economics to the problem of climate change. It highlights the fact that using unilateral measures to address climate change represent only a partial ... More

This chapter applies the concepts of environmental economics to the problem of climate change. It highlights the fact that using unilateral measures to address climate change represent only a partial solution because they will not achieve the desired level of emissions reductions. The chapter also critiques, in economic terms, the approach of dividing countries into developed and developing as an ineffective approach to addressing climate change. It further develops the idea of creating an index of countries that evolves as conditions change, called the ‘Climate Sensitivity Index’ (CSI).Less