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Making a match: Combining theory and evidence in policy-oriented macroeconomic modeling

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  • Kapetanios, G.
  • Pagan, A.
  • Scott, A.
Abstract
A persistent question arising in the development of models for the analysis of macroeconomic policy has been the relative role of economic theory and evidence (data) in their construction. This paper looks at some strategies for transforming a Conceptual Model to become a Data-Adjusted Model, and how to adjust further to an Operational Model for policy analysis. Using a typical dynamic GE small open economy calibrated to UK data, we examine how some simple but formal econometric tests can be applied to test the match of the CM to the data. We also use the CM as a laboratory to assess model-building strategies. Our example suggests that, since one will never be sure that the choice of variables is appropriate, it is better to start with a CM and work towards making it match the data than attempting the converse
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  • Kapetanios, G. & Pagan, A. & Scott, A., 2007. "Making a match: Combining theory and evidence in policy-oriented macroeconomic modeling," Journal of Econometrics, Elsevier, vol. 136(2), pages 565-594, February.
    • Handle: RePEc:eee:econom:v:136:y:2007:i:2:p:565-594
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    9. Yao, Wenying & Kam, Timothy & Vahid, Farshid, 2014. "VAR(MA), what is it good for? more bad news for reduced-form estimation and inference," Working Papers 2014-14, University of Tasmania, Tasmanian School of Business and Economics.
    10. Philip Liu & Konstantinos Theodoridis, 2012. "DSGE Model Restrictions for Structural VAR Identification," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 61-95, December.
    11. Martin Fukač & Adrian Pagan, 2010. "Limited information estimation and evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 55-70, January.
    12. Cheuk Yin Ho, 2007. "Illegal migration and economic growth: simulation analysis in an international context," Economics Bulletin, AccessEcon, vol. 6(41), pages 1-13.
    13. K. Azim Ozdemir, 2015. "Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis," Working Papers 1504, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    14. Massimo Franchi & Anna Vidotto, 2012. "A simple check for VAR representations of DSGE models," DSS Empirical Economics and Econometrics Working Papers Series 2012/5, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    15. Raghavan, Mala & Athanasopoulos, George, 2019. "Analysis of shock transmissions to a small open emerging economy using a SVARMA model," Economic Modelling, Elsevier, vol. 77(C), pages 187-203.
    16. Adrian Pagan & Tim Robinson, 2019. "Implications of Partial Information for Applied Macroeconomic Modelling," Melbourne Institute Working Paper Series wp2019n12, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
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    19. Martin Fukac & Adrian Pagan, 2006. "Issues In Adopting Dsge Models For Use In The Policy Process," CAMA Working Papers 2006-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    21. Franchi, Massimo & Vidotto, Anna, 2013. "A check for finite order VAR representations of DSGE models," Economics Letters, Elsevier, vol. 120(1), pages 100-103.
    22. Jääskelä, Jarkko P. & Jennings, David, 2011. "Monetary policy and the exchange rate: Evaluation of VAR models," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1358-1374.
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    24. Wang, Lipeng & Zhang, Mengyu & Verousis, Thanos, 2021. "The road to economic recovery: Pandemics and innovation," International Review of Financial Analysis, Elsevier, vol. 75(C).

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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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