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Macroeconometric Modelling With A Global Perspective

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  • M. HASHEM PESARAN
  • RON SMITH

Abstract

This paper provides a synthesis and further development of a global modelling approach introduced in (Journal of Business and Economic Statistics, Vol. 22 (2004), pp. 129-162), where country-specific models in the form of VARX* structures are estimated relating a vector of domestic variables, x it , to their foreign counterparts, , and then consistently combined to form a global vector autoregression. It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium model where overidentifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run overidentifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where variables can be interpreted as proxies for regional and global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. The paper also provides some new results on the relative importance of external shocks for the UK and the Euro area economies. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd and The University of Manchester.

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 74 (2006)
Issue (Month): s1 (09)
Pages: 24-49

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Handle: RePEc:bla:manchs:v:74:y:2006:i:s1:p:24-49

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References

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  1. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 04.6, Institute of Economic Policy Research (IEPR).
  2. Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0330, Faculty of Economics, University of Cambridge.
  3. Gianluca Lagana & Andrew Mountford, 2005. "Measuring Monetary Policy In The Uk: A Factor-Augmented Vector Autoregression Model Approach," Manchester School, University of Manchester, University of Manchester, vol. 73(s1), pages 77-98, 09.
  4. M. Hashem Pesaran & Til Schuermann & Björn-Jakob Treutler, 2005. "Global Business Cycles and Credit Risk," CESifo Working Paper Series 1548, CESifo Group Munich.
  5. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Forecasting Time Series Subject to Multiple Structural Breaks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1057-1084.
  6. Garratt, Anthony & Kevin Lee & M Hashem Pesaran & Yongcheol Shin, 2002. "Forecast Uncertainties In Macroeconometric Modelling: An Application to the UK Economy," Royal Economic Society Annual Conference 2002, Royal Economic Society 82, Royal Economic Society.
  7. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9706, Faculty of Economics, University of Cambridge.
  8. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2002. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 01-38, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. M. Hashem Pesaran & Yongcheol Shin, 2002. "Long-Run Structural Modelling," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1), pages 49-87.
  10. Anthony Garratt & Donald Robertson & Stephen Wright, 2005. "Permanent vs Transitory Components and Economic Fundamentals," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0501, Birkbeck, Department of Economics, Mathematics & Statistics.
  11. George Kapetanios & M. Hashem Pesaran, 2005. "Alternative Approaches to Estimation and Inference in Large Multifactor Panels: Small Sample Results with an Application to Modelling of Asset Returns," CESifo Working Paper Series 1416, CESifo Group Munich.
  12. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
  13. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  14. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2012. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199650460, October.
  15. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 835, Department of Economics and Business, Universitat Pompeu Fabra.
  16. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  17. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4848, C.E.P.R. Discussion Papers.
  18. repec:cup:etheor:v:11:y:1995:i:3:p:530-36 is not listed on IDEAS
  19. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  20. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9415, Faculty of Economics, University of Cambridge.
  21. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 387-422, January.
  22. Clive, W.J. & Lin, Jin-Lung, 1995. "Causality in the Long Run," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(03), pages 530-536, June.
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