The Econometrics Of Macroeconomic Modelling

by Bårdsen, Gunnar; Eitrheim, Øyvind; Jansen, Eilev S.; Nymoen, Ragnar

• ISBN13: 9780199246496
• ISBN10: 0199246491
• Format: Hardcover
• Copyright: 2005-06-23
• Publisher: Oxford University Press

Summary

This book describes how and why the discipline of macroeconometric modelling continues to play a role for economic policymaking by adapting to changing demands, in response, for instance, to new policy regimes like inflation targeting. Model builders have adopted new insights from economic theory and taken advantage of the methodological and conceptual advances within time series econometrics over the last twenty years. About the Series Advanced Texts in Econometrics is a distinguished and rapidly expanding series in which leading econometricians assess recent developments in such areas as stochastic probability, panel and time series data analysis, modeling, and cointegration. In both hardback and affordable paperback, each volume explains the nature and applicability of a topic in greater depth than possible in introductory textbooks or single journal articles. Each definitive work is formatted to be as accessible and convenient for those who are not familiar with the detailed primary literature.

Table of Contents

List of Figures	xv
List of Tables	xix
List of Abbreviations	xxi
1 Introduction	1	(16)
1.1 The case for macroeconometric models	1	(3)
1.2 Methodological issues (Chapter 2)	4	(3)
1.3 The supply-side and wage- and price-setting (Chapters 3-8)	7	(4)
1.4 The transmission mechanism (Chapters 9 and 10)	11	(4)
1.5 Forecast properties (Chapter 11)	15	(2)
2 Methodological issues of large-scale macromodels	17	(18)
2.1 Introduction: small vs. large models	17	(3)
2.2 The roles of statistics and economic theory in macroeconometrics	20	(4)
2.2.1 The influx of statistics into economics	20	(2)
2.2.2 Role of economic theory in macroeconometrics	22	(2)
2.3 Identifying partial structure in submodels	24	(5)
2.3.1 The theory of reduction	24	(2)
2.3.2 Congruence	26	(3)
2.4 An example: modelling the household sector	29	(3)
2.4.1 The aggregate consumption function	30	(1)
2.4.2 Rival models	31	(1)
2.5 Is modelling subsystems and combining them to a global model a viable procedure?	32	(3)
3 Inflation in open economies: the main-course model	35	(10)
3.1 Introduction	35	(2)
3.2 Cointegration	37	(8)
3.2.1 Causality	41	(1)
3.2.2 Steady-state growth	42	(1)
3.2.3 Early empiricism	42	(1)
3.2.4 Summary	43	(2)
4 The Phillips curve	45	(28)
4.1 Introduction	45	(2)
4.1.1 Lineages of the Phillips curve	46	(1)
4.2 Cointegration, causality, and the Phillips curve natural rate	47	(5)
4.3 Is the Phillips curve consistent with persistent changes in unemployment?	52	(2)
4.4 Estimating the uncertainty of the Phillips curve NAIRU	54	(2)
4.5 Inversion and the Lucas critique	56	(6)
4.5.1 Inversion	56	(1)
4.5.2 Lucas critique	57	(2)
4.5.3 Model-based vs. data-based expectations	59	(2)
4.5.4 Testing the Lucas critique	61	(1)
4.6 An empirical open economy Phillips curve system	62	(11)
4.6.1 Summary	72	(1)
5 Wage bargaining and price-setting	73	(16)
5.1 Introduction	73	(1)
5.2 Wage bargaining and monopolistic competition	74	(4)
5.3 The wage curve NAIRU	78	(1)
5.4 Cointegration and identification	79	(3)
5.5 Cointegration and Norwegian manufacturing wages	82	(4)
5.6 Aggregate wages and prices: UK quarterly data	86	(1)
5.7 Summary	87	(2)
6 Wage-price dynamics	89	(38)
6.1 Introduction	89	(1)
6.2 Nominal rigidity and equilibrium correction	90	(2)
6.3 Stability and steady state	92	(3)
6.4 The stable solution of the conditional wage-price system	95	(7)
6.4.1 Cointegration, long-run multipliers, and the steady state	97	(1)
6.4.2 Nominal rigidity despite dynamic homogeneity	98	(1)
6.4.3 An important unstable solution: the no wedge' case	99	(1)
6.4.4 A main-course interpretation	100	(2)
6.5 Comparison with the wage-curve NAIRU	102	(2)
6.6 Comparison with the wage Phillips curve NAIRU	104	(1)
6.7 Do estimated wage-price models support the NAIRU view of equilibrium unemployment?	105	(3)
6.7.1 Empirical wage equations	105	(2)
6.7.2 Aggregate wage-price dynamics in the United Kingdom	107	(1)
6.8 Econometric evaluation of Nordic structural employment estimates	108	(9)
6.8.1 The NAWRU	109	(2)
6.8.2 Do NAWRU fluctuations match up with structural changes in wage formation?	111	(5)
6.8.3 Summary of time varying NAIRUs in the Nordic countries	116	(1)
6.9 Beyond the natural rate doctrine: unemployment-inflation dynamics	117	(6)
6.9.1 A complete system	117	(2)
6.9.2 Wage-price dynamics: Norwegian manufacturing	119	(4)
6.10 Summary	123	(4)
7 The New Keynesian Phillips curve	127	(20)
7.1 Introduction	127	(2)
7.2 The NPCM defined	129	(1)
7.3 NPCM as a system	130	(4)
7.4 Sensitivity analysis	134	(2)
7.5 Testing the specification	136	(9)
7.5.1 An encompassing representation	136	(1)
7.5.2 Testing against richer dynamics	137	(2)
7.5.3 Evaluation of the system	139	(2)
7.5.4 Testing the encompassing implications	141	(3)
7.5.5 The NPCM in Norway	144	(1)
7.6 Conclusions	145	(2)
8 Money and inflation	147	(52)
8.1 Introduction	147	(1)
8.2 Models of money demand	148	(3)
8.2.1 The velocity of circulation	148	(2)
8.2.2 Dynamic models	150	(1)
8.2.3 Inverted money demand equations	150	(1)
8.3 Monetary analysis of Euro-area data	151	(4)
8.3.1 Money demand in the Euro area 1980-97	151	(1)
8.3.2 Inversion may lead to forecast failure	152	(3)
8.4 Monetary analysis of Norwegian data	155	(6)
8.4.1 Money demand in Norway-revised and extended data	155	(4)
8.4.2 Monetary effects in the inflation equation?	159	(2)
8.5 Inflation models for the Euro area	161	(5)
8.5.1 The wage-price block of the Area Wide Model	162	(1)
8.5.2 The Incomplete Competition Model	163	(1)
8.5.3 The New Keynesian Phillips Curve Model	163	(1)
8.5.4 The P*-model of inflation	164	(2)
8.6 Empirical evidence from Euro-area data	166	(16)
8.6.1 The reduced form AWM inflation equation	166	(1)
8.6.2 The reduced form ICM inflation equation	167	(2)
8.6.3 The P*-model	169	(5)
8.6.4 The New Keynesian Phillips curve	174	(1)
8.6.5 Evaluation of the inflation models' properties	175	(3)
8.6.6 Comparing the forecasting properties of the models	178	(3)
8.6.7 Summary of findings-Euro-area data	181	(1)
8.7 Empirical evidence for Norway	182	(17)
8.7.1 The Incomplete Competition Model	182	(1)
8.7.2 The New Keynesian Phillips curve	183	(2)
8.7.3 Inflation equations derived from the P*-model	185	(3)
8.7.4 Testing for neglected monetary effects on inflation	188	(2)
8.7.5 Evaluation of inflation models' properties	190	(2)
8.7.6 Comparing the forecasting properties of the models	192	(4)
8.7.7 Summary of the findings-Norway vs. Euro area	196	(3)
9 Transmission channels and model properties	199	(26)
9.1 Introduction	199	(3)
9.2 The wage-price model	202	(5)
9.2.1 Modelling the steady state	202	(2)
9.2.2 The dynamic wage-price model	204	(3)
9.3 Closing the model: marginal models for feedback variables	207	(7)
9.3.1 The nominal exchange rate vt	207	(3)
9.3.2 Mainland GDP output yt	210	(1)
9.3.3 Unemployment ut	210	(1)
9.3.4 Productivity at	211	(1)
9.3.5 Credit expansion crt	212	(1)
9.3.6 Interest rates for government bonds RBOt and bank loans RLt	213	(1)
9.4 Testing exogeneity and invariance	214	(2)
9.5 Model performance	216	(4)
9.6 Responses to a permanent shift in interest rates	220	(2)
9.7 Conclusions	222	(3)
10 Evaluation of monetary policy rules	225	(20)
10.1 Introduction	225	(2)
10.2 Four groups of interest rate rules	227	(4)
10.2.1 Revisions of output data: a case for real-time variables?	229	(1)
10.2.2 Data input for interest rate rules	230	(1)
10.2.3 Ex post calculated interest rate rules	230	(1)
10.3 Evaluation of interest rate rules	231	(12)
10.3.1 A new measure RMSTEs	231	(1)
10.3.2 RMSTEs and their decomposition	232	(5)
10.3.3 Relative loss calculations	237	(3)
10.3.4 Welfare losses evaluated by response surface estimation	240	(3)
10.4 Conclusions	243	(2)
11 Forecasting using econometric models	245	(36)
11.1 Introduction	245	(4)
11.2 EqCMs vs. dVARs in macroeconometric forecasting	249	(18)
11.2.1 Forecast errors of bivariate EqCMs and dVARs	250	(9)
11.2.2 A large-scale EqCM model and four dVAR type forecasting systems based on differenced data	259	(8)
11.3 Model specification and forecast accuracy	267	(12)
11.3.1 Forecast errors of stylised inflation models	268	(5)
11.3.2 Revisiting empirical models of Norwegian inflation	273	(3)
11.3.3 Forecast comparisons	276	(3)
11.4 Summary and conclusions	279	(2)
Appendix	281	(22)
A.1 The Lucas critique	281	(1)
A.2 Solving and estimating rational expectations models	282	(10)
A.2.1 Repeated substitution	282	(3)
A.2.2 Undetermined coefficients	285	(3)
A.2.3 Factorization	288	(2)
A.2.4 Estimation	290	(2)
A.2.5 Does the MA(1) process prove that the forward solution applies?	292	(1)
A.3 Calculation of interim multipliers in a linear dynamic model: a general exposition	292	(11)
A.3.1 An example	295	(8)
Bibliography	303	(24)
Author Index	327	(6)
Subject Index	333