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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The aggregate consumption function

The model for aggregate consumption in B&N satisfies the criteria we listed in Section 2.3. They provide a model in which cointegration analysis establishes that the linear relationship

cht = constant + 0.56yht + 0.27wht, (2.6)

is a cointegrating relationship and that the cointegration rank is one. Hence, while the individual variables in (2.6) are assumed to be non-stationary and integrated, the linear combination of the three variables is stationary with a constant mean showing the discrepancy between consumption and its long-run equilibrium level 0.56yht +0.27wht. Moreover, income and wealth are weakly exogenous for the cointegration parameters. Hence, the equilibrium correction model for Acht satisfies the requirements of valid conditioning...

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Comparison with the wage-curve NAIRU

In Chapter 5 we saw that the model with bargained wages and price-setting firms defined a certain level of unemployment denoted uw at which the con­flicting real wage claims were reconciled. Moreover, if there is no wedge term in wage-setting, theory implies that uw depends only of factors in wage – and price-setting.

Recall first that the two long-term relationships are

wage-setting Wq, t = mb + iat + upq, t — wut + ecmb, t, E[ecmb, t] = 0,

price-setting wq, t = mf + at + dut + ecmf, t, E[ecmf, t] = 0.

image078 image079 Подпись: ш > 0. Подпись: (6.37)

The counterpart to uw is derived by taking the (unconditional) expectation on both sides of (5.11) and (5.14) and solving for the rate of unemployment:

We add a time subscript to Uw, since the mean of productivity, a non-stationary variable, enters on the right-hand side of the...

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Is the Phillips curve consistent with persistent changes in unemployment?

In the expressions for the main-course NAIRU (4.5) and (4.10), wphl1 depends on parameters of the wage Phillips curve (4.1) and exogenous growth rates. The coefficients of the unemployment equation do not enter into the natural rate NAIRU expression. In the other version of the Phillips curve, the expression for the NAIRU depends on parameters of price-setting as well as wage-setting, that is, the model is specified as a price Phillips curve rather than a wage Phillips curve. But the NAIRU expression from a price Phillips curve remains independent of parameters from equation (4.2) (or its counterpart in other specifications).

The fact that an important system property (the equilibrium of unem­ployment) can be estimated from a single equation goes some way towards explaining the popularity ...

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The New Keynesian Phillips curve

Hitherto, we have considered, models that have a unique backward solu­tion, given a set of initial conditions. Even though individual variables may be dominated, by unit roots, models defined in terms of differences and cointegration relationships are also asymptotically stable. Models with, forward-looking expectations are not contained by this framework. Recently a coherent theory of price-setting with rational expectations has gained in popularity. In this chapter, we give an appraisal of the New Keynesian Phillips curve model (hereafter NPCM) as an empirical model of infla­tion. The favourable evidence for NPCMs on Euro-area data reported in earlier studies is illusive...

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