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Unit roots and all that: the impact of time-series methods on macroeconomics

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Over the past two decades applied macroeconomics has been transformed by the widespread adoption of a set of new statistical techniques: unit-root tests, vector autoregressions, Granger causality and cointegration. Although these techniques were developed to answer statistical questions, they diffused very rapidly through applied economics because they were thought to be able to answer important theoretical questions in macroeconomics. This paper argues that these techniques have not delivered on the early promises; not because they were not useful - they are very useful for many purposes - but because economists expected too much: they wanted to believe that a statistical summary of the data (an estimate or test statistic) could answer an economic question without interpretation. The paper sets out the statistical motivation for the procedures; the economic questions they were supposed to answer; and the issues that arise in trying to answer economic questions about the sources of trends and cycles, ausality and the nature of equilibrium from statistical summaries.

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  • Ron Smith, 1999. "Unit roots and all that: the impact of time-series methods on macroeconomics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 6(2), pages 239-258.
  • Handle: RePEc:taf:jecmet:v:6:y:1999:i:2:p:239-258 DOI: 10.1080/13501789900000016
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    References listed on IDEAS

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    1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, pages 553-578.
    2. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, pages 975-1000.
    3. Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, pages 634-649.
    4. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    5. Fane, George, 1985. "A derivation of the IS-LM model from explicit optimizing behavior," Journal of Macroeconomics, Elsevier, pages 493-508.
    6. Jordi GalĂ­, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
    7. Eric M. Leeper & Christopher A. Sims, 1994. "Toward a Modern Macroeconomic Model Usable for Policy Analysis," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 81-140 National Bureau of Economic Research, Inc.
    8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, January.
    9. Robert G. King, 1993. "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model?," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 67-82, Winter.
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    Cited by:

    1. Fabiani, Silvia & Locarno, Alberto & Oneto, Gian Paolo & Sestito, Paolo, 2001. "The sources of unemployment fluctuations: an empirical application to the Italian case," Labour Economics, Elsevier, vol. 8(2), pages 259-289, May.
    2. Lavan Mahadeva and Paul Robinson, 2004. "Unit Root Testing in a Central Bank," Handbooks, Centre for Central Banking Studies, Bank of England, number 22.
    3. Sproule, Robert, 2002. "The underdetermination of instructor performance by data from the student evaluation of teaching," Economics of Education Review, Elsevier, vol. 21(3), pages 287-294, June.

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    Keywords

    Unit-roots; time-series; macroeconomics;

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