The Econometrics of Macroeconomic Modelling (Advanced Texts in Econometrics)

361 Pages·2005·2.92 MB·English

by  Bårdsen G.

the econometrics of macroeconomic modelling
Other Advanced Texts in Econometrics
ARCH:SelectedReadings
EditedbyRobertF.Engle
AsymptoticTheoryforIntegratedProcesses
ByH.PeterBoswijk
BayesianInferenceinDynamicEconometricModels
ByLucBauwens,MichelLubrano,andJean-Fran¸coisRichard
Co-integration,ErrorCorrection,andtheEconometricAnalysisofNon-StationaryData
ByAnindyaBanerjee,JuanJ.Dolado,JohnW.Galbraith,andDavidHendry
DynamicEconometrics
ByDavidF.Hendry
FiniteSampleEconometrics
ByAmanUllah
GeneralizedMethodofMoments
ByAlastairHall
Likelihood-BasedInferenceinCointegratedVectorAutoregressiveModels
BySørenJohansen
Long-RunEconometricRelationships: ReadingsinCointegration
EditedbyR.F.EngleandC.W.J.Granger
Micro-EconometricsforPolicy,Program,andTreatmentEffect
ByMyoung-jaeLee
ModellingEconomicSeries: ReadingsinEconometricMethodology
EditedbyC.W.J.Granger
ModellingNon-LinearEconomicRelationships
ByCliveW.J.GrangerandTimoTer¨asvirta
ModellingSeasonality
EditedbyS.Hylleberg
Non-StationaryTimesSeriesAnalysisandCointegration
EditedbyColinP.Hargeaves
OutlierRobustAnalysisofEconomicTimeSeries
ByAndr´eLucas,PhilipHansFranses,andDickvanDijk
PanelDataEconometrics
ByManuelArellano
PeriodicityandStochasticTrendsinEconomicTimeSeries
ByPhilipHansFranses
ProgressiveModelling: Non-nestedTestingandEncompassing
EditedbyMassimilianoMarcellinoandGrayhamE.Mizon
ReadingsinUnobservedComponents
EditedbyAndrewHarveyandTommasoProietti
StochasticLimitTheory: AnIntroductionforEconometricians
ByJamesDavidson
StochasticVolatility
EditedbyNeilShephard
TestingExogeneity
EditedbyNeilR.EricssonandJohnS.Irons
TheEconometricsofMacroeconomicModelling
ByGunnarB˚ardsen,ØyvindEitrheim,EilevS.Jansen,andRagnarNymoen
TimeSerieswithLongMemory
EditedbyPeterM.Robinson
Time-Series-BasedEconometrics: UnitRootsandCo-integrations
ByMichioHatanaka
WorkbookonCointegration
ByPeterReinhardHansenandSørenJohansen
The Econometrics of
Macroeconomic Modelling
GUNNAR B˚ARDSEN
ØYVIND EITRHEIM
EILEV S. JANSEN
AND
RAGNAR NYMOEN
1
3
GreatClarendonStreet,Oxfordox2 6dp
OxfordUniversityPressisadepartmentoftheUniversityofOxford.
ItfurtherstheUniversity’sobjectiveofexcellenceinresearch,scholarship,
andeducationbypublishingworldwidein
Oxford NewYork
Auckland CapeTown DaresSalaam HongKong Karachi
KualaLumpur Madrid Melbourne MexicoCity Nairobi
NewDelhi Shanghai Taipei Toronto
Withofficesin
Argentina Austria Brazil Chile CzechRepublic France Greece
Guatemala Hungary Italy Japan Poland Portugal Singapore
SouthKorea Switzerland Thailand Turkey Ukraine Vietnam
OxfordisaregisteredtrademarkofOxfordUniversityPress
intheUKandincertainothercountries
PublishedintheUnitedStates
byOxfordUniversityPressInc.,NewYork
(cid:1)c GunnarB˚ardsen,ØyvindEitrheim,EilevS.Jansen,andRagnarNymoen2005
Themoralrightsoftheauthorshavebeenasserted
DatabaserightOxfordUniversityPress(maker)
Firstpublished2005
Allrightsreserved. Nopartofthispublicationmaybereproduced,
storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,
withoutthepriorpermissioninwritingofOxfordUniversityPress,
orasexpresslypermittedbylaw,orundertermsagreedwiththeappropriate
reprographicsrightsorganization. Enquiriesconcerningreproduction
outsidethescopeoftheaboveshouldbesenttotheRightsDepartment,
OxfordUniversityPress,attheaddressabove
Youmustnotcirculatethisbookinanyotherbindingorcover
andyoumustimposethissameconditiononanyacquirer
BritishLibraryCataloguinginPublicationData
Dataavailable
LibraryofCongressCataloginginPublicationData
Dataavailable
TypesetbyNewgenImagingSystems(P)Ltd.,Chennai,India
PrintedinGreatBritain
onacid-freepaperby
BiddlesLtd.,King’sLynn
ISBN 0-19-924649-1 978-0-19-9246496
ISBN 0-19-924650-5 978-0-19-9246502
3 5 7 9 10 8 6 4 2
E.S.J.: To Kristin
G.B.: To Tordis
R.N.: To Kjersti-Gro
Ø.E.: To Gro
This page intentionally left blank
Preface
At the European Meeting of the Econometric Society in Santiago de
Compostela in September 1999, Clive Granger asked if we would like to write
a book for the Advanced Texts in Econometrics series about the approach to
macroeconometric modelling we had adopted at the Research Department of
NorgesBankoverthepast15years. Ithastakenus5yearstocomplywithhis
request, and the result is found within these covers.
Thisbookisaboutbuildingmodelsbytestinghypothesesofmacroeconomic
theories–rather than by imposing theories untested. This is quite a crucial
distinction in macroeconometric model building. For an empirical model to be
useful, be it as a basis for economic policy decisions or for forecasting, it needs
to describe the relevant aspects of reality. Simplification is the main virtue
of theoretical model building. In empirical modelling it might easily become
a vice. A theoretical model is often reduced to just those equations that are
required to make it work for the problem at hand. A good empirical model
shouldalsobeabletoexplainproblemsthatmightoccur. Einstein’sadvicethat
‘everything should be as simple as possible...but no simpler’ is as relevant as
ever. If a model does not describe the data, it may just be too simple to be
used as a tool for macroeconomic decision making.
The main target group for the book is researchers and practitioners of
macroeconomicmodelbuildinginacademia,privateagenciesandgovernmental
services. As a textbook it can be used in graduate courses on applied macro-
econometrics in general and—more specifically—in courses focusing on wage
and price formation in the open economy. In that context it is obvious that
a companion text on econometric methods and practice will be useful, and we
recommend Dynamic Econometrics by David F. Hendry (Hendry 1995a) and
Empirical Modeling of Economic Time Series by Neil R. Ericsson (Ericsson
2005) for this purpose.
The work on the book has formed a joint research agenda for the authors
since its conception. Hence, we draw extensively on our published papers,
manyofwhichwaswrittenwiththedemandsofthisbookinmind: Section1.4
and Chapter 2 are based on Jansen (2002); Sections 5.6 and 6.7.2 on B˚ardsen
etal. (1998);Sections6.1–6.3onKolsrudandNymoen(1998)andB˚ardsenand
Nymoen (2003); Section 6.8 on Holden and Nymoen (2002) and Nymoen and
Rødseth (2003); Chapter 7 on B˚ardsen et al. (2004), Section 8.4 on Eitrheim
vii
viii Preface
(1998); Chapter 9 on B˚ardsen et al. (2003); Section 11.2 on Eitrheim et al.
(1999, 2002a) and Section 11.3 on B˚ardsen et al. (2002a).
Also,wehaveusedmaterialfromunpublishedjointworkwithotherauthors.
In particular we would like to thank Q. Farooq Akram, Neil R. Ericsson and
NevaA.Kerbeshianfortheirpermissiontodoso: Akrametal. (2003)underlies
Chapter 10 and we draw on Ericsson et al. (1997) in Section 4.4.
The views are those of the authors and should not be interpreted to reflect
those of their respective institutions. Throughout the book our main econo-
metric tools have been the programs developed by Jurgen A. Doornik, David
F. Hendry and Hans-Martin Krolzig, i.e., the Oxmetrics package (provided by
TimberlakeConsultants),inparticularPcGive,PcFIMLandPcGets. InChap-
ter7andSections9.5and10.3wehaveusedEviews(providedbyQuantitative
Micro Software) and the simulations in Section 11.2.2 are carried out with
TROLL (provided by Intex Solutions).
Data documentation, data series, programs and detailed information about
the software used are available from a homepage for the book:
http://www.svt.ntnu.no/iso/macroectrics.
We are indebted to many colleagues and friends for comments, discussions
and critisism to the various parts of the book. The editors of the series—Clive
W. J. Granger and Grayham E. Mizon—have given us advice and constant
encouragement. David F. Hendry and Bjørn E. Naug have read the entire
manuscript and given us extensive, constructive and very helpful comments.
In addition to those already acknowledged, grateful thanks goes to: Q. Farooq
Akram,OlavBjerkholt,NeilR.Ericsson,PaulG.Fisher,RogerHammersland,
Steinar Holden, Tore Anders Husebø, K˚are Johansen, Søren Johansen, Adrian
Pagan, Asbjørn Rødseth, Timo Tera¨svirta, Anders Vredin, Kenneth F. Wallis,
and Fredrik Wulfsberg. Last, but not least, we are indebted to Jurgen A.
Doornik for his generosity with both time, patience, and effort throughout the
project.
While working on the book Gunnar B˚ardsen has visited the School of
Economics and Finance, Queensland University of Technology (November
2000–January 2001) and Department of Economics, University of California
SanDiego(March2003),andEilevS.JansenhasbeenavisitoratDepartment
of Economics, University of Oslo (August 2001–January 2003), DG Research,
EuropeanCentralBank,Frankfurt(February2003–June2003)andDepartment
of Economics, University of California San Diego (August 2003–July 2004).
The hospitality and excellent working conditions offered at those institutions
are gratefully acknowledged.
Finally, we are grateful to our respective employers—Norges Bank,
Norwegian University of Science and Technology, and University of Oslo—for
allocatingresourcesandtimeforthisproject. Thatsaid, thetimespentonthe
book has often gone beyond normal hours, which is but one reason why this
book is dedicated to our wonderful and wise wives.
Trondheim/Oslo, November 2004
Gunnar B˚ardsen, Øyvind Eitrheim, Eilev S. Jansen and Ragnar Nymoen
Contents
List of Figures xv
List of Tables xix
List of Abbreviations xxi
1 Introduction 1
1.1 The case for macroeconometric models 1
1.2 Methodological issues (Chapter 2) 4
1.3 The supply-side and wage- and price-setting
(Chapters 3–8) 7
1.4 The transmission mechanism (Chapters 9 and 10) 11
1.5 Forecast properties (Chapter 11) 15
2 Methodological issues of large-scale macromodels 17
2.1 Introduction: small vs. large models 17
2.2 The roles of statistics and economic theory
in macroeconometrics 20
2.2.1 The influx of statistics into economics 20
2.2.2 Role of economic theory in
macroeconometrics 22
2.3 Identifying partial structure in submodels 24
2.3.1 The theory of reduction 24
2.3.2 Congruence 26
2.4 An example: modelling the household sector 29
2.4.1 The aggregate consumption function 30
2.4.2 Rival models 31
2.5 Is modelling subsystems and combining them to
a global model a viable procedure? 32
3 Inflation in open economies: the main-course model 35
3.1 Introduction 35
3.2 Cointegration 37
3.2.1 Causality 41
ix