E-Book Overview
In this book Ray Fair expounds powerful techniques for estimating and analyzing macroeconometric models. He takes advantage of the remarkable decrease in computational costs that has occurred since the early 1980s by implementing such sophisticated techniques as stochastic simulation. Testing Macroeconometric Models also incorporates the assumption of rational expectations in the estimation, solution, and testing of the models. And it presents the latest versions of Fair's models of the economies of the United States and other countries.
After estimating and testing the U.S. model, Fair analyzes its properties, including those relevant to economic policymakers: the optimal monetary policy instrument, the effect of a government spending reduction on the government deficit, whether monetary policy is becoming less effective over time, and the sensitivity of policy effects to the assumption of rational expectations.
Ray Fair has conducted research on structural macroeconometric models for more than twenty years. With interest increasing in the area, this book will be an essential reference for macroeconomists.
E-Book Content
Testing Macroeconometric Models
Testing Macroeconometric Models
Ray C. Fair
Harvard University Press Cambridge, Massachusetts London, England 1994
Copyright © 1994 by the President and Fellows of Harvard College All rights reserved Printed in the United States of America This book is printed on acid-free paper, and its binding materials have been chosen for strength and durability. Library of Congress Cataloging-in-Publication Data Fair, Ray C. Testing macroeconometric models / Ray C. Fair. p. cm. Includes bibliographical references and index. ISBN 0-674-87503-6 (acid-free paper) 1. United States—Economic conditions—1945– —Econometric models. 2. Econometric models. I. Title HC106.5.F32 1994 330.973—dc20 94-13914 CIP
To my son, John, who wasn’t born in time to make the dedication of the previous book
Contents Preface
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17 17 17 19 20 21 22 24 24 25 25 29 30 30 37 38
The Data, Variables, and Equations 3.1 Transition from Theory to Empirical Specifications . . . . . 3.2 The US Model . . . . . . . . . . . . . . . . . . . . . . . .
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Introduction 1.1 Background . . . . . . . . . . . . 1.2 The Cowles Commission Approach 1.3 The Real Business Cycle Approach 1.4 The New Keynesian Economics . . 1.5 Looking Ahead . . . . . . . . . . .
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Theory 2.1 One Country . . . . . . . . . . . . . . 2.1.1 Background . . . . . . . . . . 2.1.2 Household Behavior . . . . . . 2.1.3 Firm Behavior . . . . . . . . . 2.1.4 Bank and Government Behavior 2.1.5 The Complete Model . . . . . 2.2 Two Countries . . . . . . . . . . . . . 2.2.1 Background . . . . . . . . . . 2.2.2 Notation . . . . . . . . . . . . 2.2.3 Equations . . . . . . . . . . . 2.2.4 Closing the Model . . . . . . . 2.2.5 Links in the Model . . . . . . . 2.2.6 Properties of the Model . . . . 2.2.7 The Use of Reaction Functions 2.2.8 Further Aggregation . . . . . .
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