The Canadian Economic and Fiscal Model - 1996 Version: Part 2 - Empirical Specification and Statistical Assessment

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The Canadian Economic and Fiscal Model - 1996 Version: Part 2 - Empirical Specification and Statistical Assessment

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Jian-Guo Cao
Benoît Robidoux

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Benoit Robidoux

Abstract

The Canadian Economic and Fiscal Model (CEFM) is used by the Department of Finance to forecast key economic and fiscal indicators and to simulate the economic and fiscal impacts of policy or economic changes. The theoretical structure of the 1996 version of the model, CEFM96, as well as its dynamic forecasting, and simulation properties are discussed in two companion papers. This paper documents the equations estimated in the model and gives statistical assessments of them. The paper provides detailed regression results, residual-based diagnostic tests, and single-equation dynamic forecasts for all estimated equations to assess their statistical accuracy and forecasting performance. Residual-based tests include autocorrelation, heteroscedasticity, normality, and specification tests. Dynamic forecasts include in-sample dynamic simulations, as well as short- and long-run out-of-sample dynamic simulations. For key economic relationships in the model, we apply a more exhaustive estimation process suggested by new developments in the macroeconometric analysis of time series. In a first step, unit root and cointegration tests are performed to validate statistically the underlying economic models suggested by the economic theory. In a second step, a general-to-specific approach is used to develop error-correction models. This framework has the advantage of allowing us to test long run relationships between (or impose them on) economic variables, as often suggested by economic theory, without imposing the relationships on short-term dynamics. Finally, we verify the statistical adequacy of these models by applying the above diagnostic and forecasting tests.

Le Modèle Économique et Fiscal Canadien (MEFC), est utilisé par le Ministère des Finances pour prévoir les indicateurs économiques et fiscaux clés, ainsi que pour simuler l'impact économique et fiscal de changements économiques ou de politiques. La structure théorique de la version 1996 du modèle, MEFC96, ainsi que ses propriétés de prévision et de simulation dynamique sont discutées documentées dans deux autres documents. Ce rapport documente les équations estimées du modèle et présente une évaluation statistique de celles-ci. Ce rapport collige les résultats détaillés de régressions, de tests de spécification appliqués aux résidus et d'évaluation de prévision pour toutes les équations stochastiques du modèle dans le but d'évaluer leur pertinence statistique et prévisionnelle. Les tests de spécification appliqués aux résidus incluent des tests d'autocorrélation, d'hétéroscédasticité, de normalité et de forme fonctionnelle. Les prévisions dynamiques incluent des simulations dynamiques intra-échantillon ainsi que des simulations dynamiques hors échantillon à court et à long terme. Pour les relations économiques clés du modèle, nous appliquons un processus d'estimation plus exhaustif basé sur des développements récents de l'analyse macroéconométrique des séries chronologiques. Dans un premier temps, des tests de racine unitaire et de co-integration sont réalisés afin de valider statistiquement les modèles et théories économiques sous-jacents à l'analyse. Dans un deuxième temps, une approche genérale-spécifique, basée sur l'élagage d'éléments non significatifs, est utilisée pour développer des modèles de correction des erreurs. Ce cadre d'analyse à l'avantage de permettre de tester ou d'imposer des relations de long terme entre les variables économiques, souvent suggérées par la théorie économique, sans imposer ces relations sur la dynamique de court terme. Finalement, la pertinence statistique et prévisionnelle de ces modèles est vérifiée à l'aide des tests de spécification.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 1998-07.

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Handle: RePEc:fca:wpfnca:1998-07

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This paper has been announced in the following NEP Reports:

NEP-ALL-2003-11-09 (All new papers)
NEP-CMP-2003-11-09 (Computational Economics)

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