Category THE ECONOMETRICS OF MACROECONOMIC MODELLING

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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Cointegration, causality, and the Phillips curve natural rate

As indicated earlier, there are many ways that a Phillips curve for an open econ­omy can be derived from economic theory. Our appraisal of the Phillips curve in this section builds on Calmfors (1977), who reconciled the Phillips curve with the Scandinavian model of inflation. We want to go one step further, however, and incorporate the Phillips curve in a framework that allows for integrated wage and price series. Reconstructing the model in terms of cointegration and causality reveals that the Phillips curve version of the main-course model forces a particular equilibrium correction mechanism on the system...

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Wage-price dynamics: Norwegian manufacturing

In this section, we return to the manufacturing data set of Section 4.6 (Phillips curve), and 5.5 (wage curve). In particular, we recapitulate the cointegration analysis of Section 5.5:

1. A long-run wage equation for the Norwegian manufacturing industry:

wct — qt — at = — 0.065 tut + 0.184 rprt + ecmw t, (6.58)

(0.081) (0.036)

that is, equation (5.22). rprt is the log of the replacement ratio.

2. No wedge term in the wage curve cointegration relationship (i. e. ш = 0).

3. Nominal wages equilibrium correct, 6w > 0.

4. Weak exogeneity of qt, at, tut, and rprt with respect to the parameters of the cointegration relationship.

These results suggest a ‘main-course’ version of the system (6.51)-(6.57): as shown in Section 6.4...

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The case for macroeconometric models

Macroeconometric models, in many ways the flagships of the economics profes­sion in the 1960s, came under increasing attack from both theoretical economics and practitioners in the late 1970s. The onslaught came on a wide front: lack of microeconomic theoretical foundations, ad hoc modelling of expectations, lack of identification, neglect of dynamics and non-stationarity, and poor forecasting properties. As a result, by the start of the 1990s, the status of macroeconomet­ric models had declined markedly, and had fallen completely out of (and with!) academic economics. Specifically, it has become increasingly rare that university programmes in economics give courses in large-scale empirical macroeconomic modelling.

Nevertheless, unlike the dinosaurs which they often have been likened to,...

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Cointegration and identification

In Chapter 3, we made the following assumptions about the time-series prop­erties of the variables we introduced: nominal and real wages and productivity are I (1), while, possibly after removal of deterministic shifts, the rate of unem­ployment is without a unit root. A main concern is clearly how the theoretical wage curve model can be reconciled with these properties of the data. In other words: how should the long-run wage equation be specified to attain a true cointegrating relationship for real wages, and to avoid the pitfall of spurious regressions?

As we have seen, according to the bargaining theory, the term mq, t in (5.5) depends on average productivity, At...

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