On Aggregation of Linear Dynamic Models
This paper provides a general framework for aggregating linear dynamic models by deriving the aggregate model as an optimal prediction of the aggregate variable of interest with respect to an aggregate information set generated by current and past values of available aggregate observations. The paper shows how the results in the literature can be readily obtained using the proposed forecasting approach, and provides a number of important extensions and generalisations. In particular, it does not require the assumption of independence of the micro distributed lag coefficients, and establishes that in general the long-run coefficients obtained from the optimal aggregate relation are equal to the averages of the long-run coefficients from the micro relations. Finally, the approach advocated in the paper is applied to aggregation of life-cycle decision rules under habit formation, and the implications of the heterogeneity in habit formation coefficients across individuals for the analysis of aggregate consumption are investigated.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lewbel, Arthur, 1994. "Aggregation and Simple Dynamics," American Economic Review, American Economic Association, vol. 84(4), pages 905-18, September.
- Van Garderen, K. J. & Lee, K. & Pesaran M., 1998.
"Cross-sectional Aggregation of Non-linear Models,"
Cambridge Working Papers in Economics
9803, Faculty of Economics, University of Cambridge.
- Binder, Michael & Pesaran, M. Hashem, 2001. "Life-cycle consumption under social interactions," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 35-83, January.
- Stoker, Thomas M, 1984. "Completeness, Distribution Restrictions, and the Form of Aggregate Functions," Econometrica, Econometric Society, vol. 52(4), pages 887-907, July.
- Lippi, Marco, 1988. "On the dynamic shape of aggregated error correction models," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 561-585.
- Christoffersen & Diebold, .
"Further Results on Forecasting and Model Selection Under Asymmetric Loss,"
_059, University of Pennsylvania.
- Christoffersen, Peter F & Diebold, Francis X, 1996. "Further Results on Forecasting and Model Selection under Asymmetric Loss," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 561-71, Sept.-Oct.
- Granger, Clive W. J. & Ding, Zhuanxin, 1996. "Varieties of long memory models," Journal of Econometrics, Elsevier, vol. 73(1), pages 61-77, July.
- Christopher D. Carroll & David N. Weil, 1993.
"Saving and Growth: A Reinterpretation,"
NBER Working Papers
4470, National Bureau of Economic Research, Inc.
- Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 133-192, June.
- Harry H. Kelejian, 1980. "Aggregation and Disaggregation of Nonlinear Equations," NBER Chapters, in: Evaluation of Econometric Models, pages 135-152 National Bureau of Economic Research, Inc.
- Stoker, Thomas M, 1993. "Empirical Approaches to the Problem of Aggregation Over Individuals," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1827-74, December.
- Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
- Johansen, Leif, 1972. "Simple and general nonsubstitution theorems for input-output models," Journal of Economic Theory, Elsevier, vol. 5(3), pages 383-394, December.
- John Muellbauer, 1975. "Aggregation, Income Distribution and Consumer Demand," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 525-543.
- Rose, David E., 1977. "Forecasting aggregates of independent Arima processes," Journal of Econometrics, Elsevier, vol. 5(3), pages 323-345, May.
- Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
- Lutkepohl, Helmut, 1984. "Linear transformations of vector ARMA processes," Journal of Econometrics, Elsevier, vol. 26(3), pages 283-293, December.
- P. K. Trivedi, 1985. "Distributed Lags, Aggregation and Compounding: Some Econometric Implications," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 19-35.
- H. S. Houthakker, 1955. "The Pareto Distribution and the Cobb-Douglas Production Function in Activity Analysis," Review of Economic Studies, Oxford University Press, vol. 23(1), pages 27-31.
- Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
When requesting a correction, please mention this item's handle: RePEc:cam:camdae:9919. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jake Dyer)
If references are entirely missing, you can add them using this form.