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STLS/US-VECM6.1: a vector error-correction forecasting model of the U. S. economy

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Author Info
Dennis L. Hoffman
Robert H. Rasche

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Abstract

Any research or policy analysis exercise in economics must be consistent with the time-series properties of observed macroeconomic data. This paper discusses in detail the specification of a six-variable vector error-correction forecasting model. We test for cointegration among those variables: the CPI, the implicit price deflator for GDP, real money balances (M1), the federal funds rate, the yield on long-term (10-year) government bonds, and real GDP. We also examine the estimated dynamic parameters of the vector error correction structure, and analyze the properties of the model residuals in detail; discuss the forecasting performance of the model with particular reference to the 1990-91 recession and the 1994-95 expansion; compare alternative permanent/transitory decompositions of the data series that are implied by the estimated parameters of the model; discuss the role of weak exogeneity in our estimated structure, and the identifying restrictions that are sufficient to determine a 'historical policy rule' within the sample; discuss the conditions required for identification of 'dynamic economic models' from the reduced form VECM structure and apply one set of exactly identifying restrictions to derive impulse response functions for a permanent nominal shock and a permanent real shock; and, report some ex-ante forecasts from recent history.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1997-008.

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Date of creation: 1997
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Handle: RePEc:fip:fedlwp:1997-008

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Keywords: Forecasting ; Vector autoregression;

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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Hendry, David F & Starr, Ross M, 1993. "The Demand for M1 in the USA: A Reply," Economic Journal, Royal Economic Society, vol. 103(420), pages 1158-69, September. [Downloadable!] (restricted)
  3. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16. [Downloadable!]
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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  6. John Huizinga & Frederic S. Mishkin, 1986. "Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates," NBER Working Papers 1678, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56. [Downloadable!]
  8. Warne, A., 1993. "A Common Trends Model: Identification, Estimation and Inference," Papers 555, Stockholm - International Economic Studies.
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  10. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
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  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  12. Park, J.Y., 1990. "Disequilibrium Impulse Analysis," Economics Working Papers 1990-19, School of Economics and Management, University of Aarhus.
  13. Clements, M.P. & Hendry, D., 1992. "On the Limitations of Comparing Mean Square Forecast Errors," Economics Series Working Papers 99138, University of Oxford, Department of Economics.
  14. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 317-339, April. [Downloadable!] (restricted)
  15. Robert Ingenito & Bharat Trehan, 1996. "Using monthly data to predict quarterly output," Economic Review, Federal Reserve Bank of San Francisco, pages 3-11. [Downloadable!]
  16. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Fama, Eugene F., 1992. "Transitory variation in investment and output," Journal of Monetary Economics, Elsevier, vol. 30(3), pages 467-480, December. [Downloadable!] (restricted)
  18. Richard G. Anderson, 2006. "Monetary base," Working Papers 2006-049, Federal Reserve Bank of St. Louis. [Downloadable!]
  19. Hoffman, Dennis L & Rasche, Robert H, 1996. "Assessing Forecast Performance in a Cointegrated System," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 495-517, Sept.-Oct. [Downloadable!] (restricted)
  20. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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  22. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  23. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  24. Reifschneider, David L. & Stockton, David J. & Wilcox, David W., 1997. "Econometric models and the monetary policy process," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 1-37, December. [Downloadable!] (restricted)
  25. Hoffman, Dennis L & Rasche, Robert H, 1991. "Long-Run Income and Interest Elasticities of Money Demand in the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 665-74, November. [Downloadable!] (restricted)
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  26. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
  27. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March. [Downloadable!] (restricted)
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