Global and National Macroeconometric Modelling A Long-Run Structural Approach

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  • Edition: Reprint
  • Format: Paperback
  • Copyright: 2012-05-04
  • Publisher: Oxford University Press
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This book provides a comprehensive description of the state-of-the-art in modelling global and national economies. It introduces the long-run structural approach to modelling that can be readily adopted for use in understanding how economies work, and in generating forecasts for decision- and policy-makers. The book contains a thorough description of recent developments in macroeconomics and econometrics, which should be of interest to advanced students and researchers, but is alsowritten to be accessible and helpful to practitioners in government and the private sector. The long-run structural approach is illustrated with various global and national examples, including a step-by-step description of the development and use of a model of the UK economy. Throughout, the bookemphasises the use of macroeconometric modelling in the real world and is written in a way that ensures the techniques illustrated can be replicated or applied in new contexts. The transparency and pragmatism of the modelling approach used within this book will be attractive to practitioners who need manageable and interpretable models to answer specific questions.

Author Biography

Anthony Garratt is Professor of Economics at Birkbeck College, University of London. Kevin Lee is Professor of Economics at the University of Nottingham. M. Hashem Pesaran is Professor of Economics at the University of Cambridge, John Elliott Chair at the University of Southern California, and a Professorial Fellow of Trinity College, Cambridge. Yongcheol Shin is Professor of Economics at the University of York.

Table of Contents

List of tablesp. xvi
List of figuresp. xvii
Introductionp. 1
Historical backgroundp. 3
Alternative modelling approachesp. 4
The long-run modelling approachp. 6
The organisation of the bookp. 9
Macroeconometric modelling: Alternative approachesp. 13
Large-scale simultaneous equation modelsp. 13
Unrestricted and structural VARsp. 16
Unrestricted VARsp. 16
Structural VARsp. 18
Dynamic stochastic general equilibrium modelsp. 19
The structural cointegrating VAR approachp. 23
Comparisons with the alternative approachesp. 24
National and global structural macroeconometric modellingp. 33
Identification in a dynamic structural vector error correction modelp. 34
Identifying long-run relationshipsp. 36
Identifying short-run structural parameters and shocksp. 37
A modelling strategyp. 39
Specifying the dynamic structure of a macroeconomic modelp. 41
Dynamics of DSGE modelsp. 41
Dynamics of adjustment cost modelsp. 46
Identification of short-run dynamics based on 'tentative' theory on contemporaneous relationsp. 48
Measuring the effects of monetary policyp. 51
Identification using 'tentative' theory on long-run relationsp. 54
National macroeconomic modelling in a global contextp. 56
VARX models: VAR models with weakly exogenous variablesp. 57
Developing satellite or sectoral modelsp. 59
Global vector autoregressive (GVAR) modelsp. 62
An economic theory of the long runp. 67
Production technology and output determinationp. 68
Arbitrage conditionsp. 71
Accounting identities and stock-flow relationsp. 74
Long-run solvency requirementsp. 75
Liquidity (real money balances)p. 78
Imports and exportsp. 78
Econometric formulation of the modelp. 81
An economic theory of the short runp. 87
Modelling monetary policyp. 89
The monetary authority's decision problemp. 89
The derivation of the base ratep. 92
The structural interest rate equationp. 96
Alternative model specificationsp. 98
Forecast-inflation targetingp. 98
Choice of targets and their desired levelsp. 99
Econometric methods: A reviewp. 105
Augmented VAR or VARX modelsp. 107
The structural VARX modelp. 107
The reduced form VARX modelp. 109
Impulse response analysisp. 110
Cointegrating VAR modelsp. 117
Treatment of the deterministic componentsp. 118
Trace and maximum eigenvalue tests of cointegrationp. 122
Identifying long-run relationships in a cointegrating VARp. 123
Estimation of the short-run parameters of the conditional VEC modelp. 128
Analysis of stability of the cointegrated systemp. 129
Impulse response analysis in cointegrating VARsp. 132
The cointegrated VAR model with I(1) exogenous variablesp. 135
Small sample properties of test statisticsp. 140
Empirical distribution of impulse response functions and persistence profilesp. 141
Probability forecasting: Concepts and analysisp. 145
Probability forecastingp. 145
Probability forecasts in a simple univariate AR(1) modelp. 147
Modelling forecast uncertaintiesp. 153
Future and parameter uncertaintiesp. 153
Model uncertainty: Combining probability forecastsp. 157
Bayesian model averagingp. 158
Pooling of forecastsp. 159
Computation of probability forecasts: Some practical issuesp. 161
Computation of probability forecasts using analytic methodsp. 163
Computation of probability forecasts based on VAR models by stochastic simulationp. 164
Generating simulated errorsp. 166
Estimation and forecasting with conditional modelsp. 168
The UK macroeconomyp. 171
Domestic and foreign outputp. 173
Domestic and foreign pricesp. 178
Exchange ratesp. 187
Domestic and foreign interest ratesp. 189
Real money balances relative to incomep. 193
A long-run structural model of the UKp. 197
The different stages of estimation and testingp. 198
Unit root properties of the core variablesp. 200
Testing and estimating of the long-run relationsp. 204
Small sample properties of the tests of restrictions on the cointegrating vectorsp. 208
The vector error correction modelp. 209
The long-run estimatesp. 209
Error correction specificationsp. 212
Comparing the core model with benchmark univariate modelsp. 218
An alternative model specificationp. 221
Impulse response and trend/cycle properties of the UK modelp. 225
Identification of monetary policy shocksp. 227
Estimates of impulse response functionsp. 231
Effects of an oil price shockp. 232
Effects of a foreign output equation shockp. 236
Effects of a foreign interest rate equation shockp. 239
Effects of a monetary policy shockp. 242
Trend/cycle decomposition in cointegrating VARsp. 248
Relationship of GRW and BN decompositionsp. 250
Computation of the GRW decompositionp. 252
An application to the UK modelp. 254
Concluding remarksp. 260
Probability event forecasting with the UK modelp. 263
An updated version of the core modelp. 264
Estimation results and in-sample diagnosticsp. 265
Model uncertaintyp. 266
Evaluation and comparisons of probability forecastsp. 269
Probability forecasts of inflation and output growthp. 274
Point and interval forecastsp. 275
Predictive distribution functionsp. 278
Event probability forecastsp. 280
A postscriptp. 286
Concluding remarksp. 286
Global modelling and other applicationsp. 289
Recent applications of the structural cointegrating VAR approachp. 289
Regional interdependencies and credit risk modellingp. 292
A monthly version of the core modelp. 297
Probability forecasting and measuring financial distress in the UKp. 303
A satellite model of the UK financial sectorp. 303
UK financial distress in the early 1990s and early 2000sp. 305
Directions for future researchp. 306
Concluding remarksp. 309
Derivation of the interest rate rulep. 315
The relationship between policy instruments and targetsp. 316
Deriving the monetary authority's reaction functionp. 318
Inflation targeting and the base rate reaction functionp. 319
Reaction functions and targeting future values of variablesp. 320
Invariance properties of the impulse responses with respect to monetary policy shocksp. 323
Data for the UK modelp. 327
Definitions and sources of the core model variablesp. 327
Gauss programs and result filesp. 333
General comments on the Gauss programsp. 334
Impulse response and persistence profile programsp. 334
Programs for computing probability forecastsp. 337
Programs for computing out-of-sample probability event forecastsp. 338
Programs for computing in-sample probability event forecast evaluationp. 339
Program for computing the decomposition of trends in cointegrating VARsp. 342
Bibliographyp. 343
Indexp. 363
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