Category THE ECONOMETRICS OF MACROECONOMIC MODELLING

Lineages of the Phillips curve

Following Phillips’ (1958) discovery of an empirical regularity between the rate of unemployment and money wage inflation in the United Kingdom, the Phillips curve was integrated in macroeconomics through a series of papers in the 1960s. Samuelson and Solow (1960) interpreted it as a tradeoff facing policy makers, and Lipsey (1960) was the first to estimate Phillips curves with multivariate regression techniques. Lipsey interpreted the relationship from the perspective of classical price dynamics, with the rate of unemployment acting as a proxy for excess demand and friction in the labour market. Importantly, Lipsey included consumer price growth as an explanatory variable in his regressions, and thus formulated what has become known as the expectations augmented Phillips curve...

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Beyond the natural rate doctrine: unemployment-inflation dynamics

In this section, we relax the assumption, made early in the section, of exo­genously determined unemployment which, after all, was made for a specific purpose, namely for showing that under reasonable assumptions about price – and wage-setting, there exist a steady-state rate of inflation, and a steady – state growth rate for real wages for a given long-run mean of the rate of unemployment. Thus, the truism that a steady state requires that the rate of unemployment simultaneously converges to the NAIRU has been refuted. Moreover, we have investigated special cases where the natural doctrine rep­resents the only logically possible equilibrium, and have discussed how the empirical relevance of those special cases can be asserted.

6.9.1 A complete system

Equations (6.51)-(6...

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The Econometrics of. Macroeconomic Modelling

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 Norges Bank over the past 15 years. It has taken us 5 years to comply with his request, and the result is found within these covers.

This book is about building models by testing hypotheses of macroeconomic 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...

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The wage curve NAIRU

Without making further assumptions, and for a given rate of unemployment, there is no reason why wbq t in (5.5) should be equal to wf t in (5.6). However, there are really two additional doctrines of the Layard-Nickell model. First, that no equilibrium with a constant rate of inflation is possible without the condition w^ t = wf t. Second, the adjustment of the rate of unemployment is the singular equilibrating mechanism that brings about the necessary equalisation of the competing claims.

The heuristic explanation usually given is that excessive real wage claims on the part of the workers, that is, wq t > wf t, result in increasing inflation (e. g. A2pt > 0), while wbq t < w* t goes together with falling inflation (A2pt < 0)...

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An example: modelling the household sector

The complete Haavelmo distribution function—for example, the joint distri­bution (2.1) of all variables of the macro model—is not tractable and hence not an operational starting point for empirical econometric analysis. In prac­tice, we have to split the system into subsystems of variables and to analyse each of them separately. Joint modelling is considered only within subsystems. But by so doing, one risks ignoring possible influences across the subsystems. This would translate into invalid conditioning (the weak exogeneity assumption is not satisfied) and invalid marginalisation (by omitting relevant explanatory variables from the analysis), which are known to imply inefficient statistical estimation and inference...

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A main-course interpretation

In Chapter 3 we saw that an important assumption of Aukrust’s main-course model is that the wage-share is I(0), and that causation is one way: it is only the exposed sector wage that corrects deviations from the equilibrium wage share. Moreover, as maintained throughout this chapter, the reconstructed Aukrust model had productivity and the product price as exogenous I(1) processes.

The following two equations, representing wage-setting in the exposed sector, bring these ideas into our current model:

wbq t _ ть + at — wut, 0 < 1 < 1, w > 0, (6.31)

and

Awt @w (wq, t— 1 wq, t-1) + фwpApt + ФwqAqt + cw + ^w, t,

0 < Фwp + Фwq < 1, 9w > 0. (6.32)

In Section 3.2 we referred to (6.31) as the extended main-course hypothesis. It is derived from (5...

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