Global and National Macroeconometric Modelling: A Long-Run Structural Approach

Contents......Page 8
List of tables......Page 13
List of figures......Page 14
1 Introduction......Page 18
1.1 Historical background......Page 20
1.2 Alternative modelling approaches......Page 21
1.3 The long-run modelling approach......Page 23
1.4 The organisation of the book......Page 26
2.1 Large-scale simultaneous equation models......Page 30
2.2.1 Unrestricted VARs......Page 33
2.2.2 Structural VARs......Page 35
2.3 Dynamic stochastic general equilibrium models......Page 36
2.4 The structural cointegrating VAR approach......Page 40
2.4.1 Comparisons with the alternative approaches......Page 41
3 National and global structural macroeconometric modelling......Page 50
3.1 Identification in a dynamic structural vector error correction model......Page 51
3.1.1 Identifying long-run relationships......Page 53
3.1.2 Identifying short-run structural parameters and shocks......Page 54
3.1.3 A modelling strategy......Page 56
3.2.1 Dynamics of DSGE models......Page 58
3.2.2 Dynamics of adjustment cost models......Page 63
3.2.3 Identification of short-run dynamics based on ‘tentative’ theory on contemporaneous relations......Page 65
3.2.4 Measuring the effects of monetary policy......Page 68
3.2.5 Identification using ‘tentative’ theory on long-run relations......Page 71
3.3 National macroeconomic modelling in a global context......Page 73
3.3.1 VARX models: VAR models with weakly exogenous variables......Page 74
3.3.2 Developing satellite or sectoral models......Page 76
3.4 Global vector autoregressive (GVAR) models......Page 79
4 An economic theory of the long run......Page 84
4.1 Production technology and output determination......Page 85
4.2 Arbitrage conditions......Page 88
4.3 Accounting identities and stock-flow relations......Page 91
4.4 Long-run solvency requirements......Page 92
4.4.2 Imports and exports......Page 95
4.5 Econometric formulation of the model......Page 98
5 An economic theory of the short run......Page 104
5.1.1 The monetary authority’s decision problem......Page 106
5.1.2 The derivation of the base rate......Page 109
5.1.3 The structural interest rate equation......Page 113
5.2.1 Forecast-inflation targeting......Page 115
5.2.2 Choice of targets and their desired levels......Page 116
6 Econometric methods: A review......Page 122
6.1.1 The structural VARX model......Page 124
6.1.2 The reduced form VARX model......Page 126
6.1.3 Impulse response analysis......Page 127
6.2 Cointegrating VAR models......Page 134
6.2.1 Treatment of the deterministic components......Page 135
6.2.2 Trace and maximum eigenvalue tests of cointegration......Page 139
6.2.3 Identifying long-run relationships in a cointegrating VAR......Page 140
6.2.4 Estimation of the short-run parameters of the conditional VEC model......Page 145
6.2.5 Analysis of stability of the cointegrated system......Page 146
6.2.6 Impulse response analysis in cointegrating VARs......Page 149
6.3 The cointegrated VAR model with I(1) exogenous variables......Page 152
6.4 Small sample properties of test statistics......Page 157
6.5 Empirical distribution of impulse response functions and persistence profiles......Page 158
7.1 Probability forecasting......Page 162
7.1.1 Probability forecasts in a simple univariate AR(1) model......Page 164
7.2.1 Future and parameter uncertainties......Page 170
7.2.2 Model uncertainty: Combining probability forecasts......Page 174
7.2.3 Bayesian model averaging......Page 175
7.2.4 Pooling of forecasts......Page 176
7.3 Computation of probability forecasts: Some practical issues......Page 178
7.3.1 Computation of probability forecasts using analytic methods......Page 180
7.3.2 Computation of probability forecasts based on VAR models by stochastic simulation......Page 181
7.3.3 Generating simulated errors......Page 183
7.4 Estimation and forecasting with conditional models......Page 185
8 The UK macroeconomy......Page 188
8.1 Domestic and foreign output......Page 190
8.2 Domestic and foreign prices......Page 195
8.3 Exchange rates......Page 204
8.4 Domestic and foreign interest rates......Page 206
8.5 Real money balances relative to income......Page 210
9 A long-run structural model of the UK......Page 214
9.1 The different stages of estimation and testing......Page 215
9.2 Unit root properties of the core variables......Page 217
9.3 Testing and estimating of the long-run relations......Page 221
9.3.1 Small sample properties of the tests of restrictions on the cointegrating vectors......Page 225
9.4.1 The long-run estimates......Page 226
9.4.2 Error correction specifications......Page 229
9.4.3 Comparing the core model with benchmark univariate models......Page 235
9.5 An alternative model specification......Page 238
10 Impulse response and trend/cycle properties of the UK model......Page 242
10.1 Identification of monetary policy shocks......Page 244
10.2 Estimates of impulse response functions......Page 248
10.2.1 Effects of an oil price shock......Page 249
10.2.2 Effects of a foreign output equation shock......Page 253
10.2.3 Effects of a foreign interest rate equation shock......Page 256
10.2.4 Effects of a monetary policy shock......Page 259
10.3 Trend/cycle decomposition in cointegrating VARs......Page 265
10.3.1 Relationship of GRW and BN decompositions......Page 267
10.3.2 Computation of the GRW decomposition......Page 269
10.3.3 An application to the UK model......Page 271
10.4 Concluding remarks......Page 277
11 Probability event forecasting with the UK model......Page 280
11.1 An updated version of the core model......Page 281
11.1.1 Estimation results and in-sample diagnostics......Page 282
11.1.2 Model uncertainty......Page 283
11.1.3 Evaluation and comparisons of probability forecasts......Page 286
11.2 Probability forecasts of inflation and output growth......Page 291
11.2.1 Point and interval forecasts......Page 292
11.2.2 Predictive distribution functions......Page 295
11.2.3 Event probability forecasts......Page 297
11.4 Concluding remarks......Page 303
12.1 Recent applications of the structural cointegrating VAR approach......Page 306
12.2 Regional interdependencies and credit risk modelling......Page 309
12.3 A monthly version of the core model......Page 314
12.4.1 A satellite model of the UK financial sector......Page 320
12.4.2 UK financial distress in the early 1990s and early 2000s......Page 322
12.5 Directions for future research......Page 323
13 Concluding remarks......Page 326
A: Derivation of the interest rate rule......Page 332
A.1 The relationship between policy instruments and targets......Page 333
A.2 Deriving the monetary authority’s reaction function......Page 335
A.3 Inflation targeting and the base rate reaction function......Page 336
A.4 Reaction functions and targeting future values of variables......Page 337
B: Invariance properties of the impulse responses with respect to monetary policy shocks......Page 340
C.1 Definitions and sources of the core model variables......Page 344
D: Gauss programs and result files......Page 350
D.2 Impulse response and persistence profile programs......Page 351
D.3 Programs for computing probability forecasts......Page 354
D.3.1 Programs for computing out-of-sample probability event forecasts......Page 355
D.3.2 Programs for computing in-sample probability event forecast evaluation......Page 356
D.4 Program for computing the decomposition of trends in cointegrating VARs......Page 359
Bibliography......Page 360
B......Page 380
C......Page 381
D......Page 382
E......Page 383
G......Page 385
I......Page 386
L......Page 388
M......Page 389
O......Page 390
P......Page 391
R......Page 392
S......Page 393
T......Page 395
V......Page 396
Z......Page 397