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Making a match: combining theory and evidence in policy-oriented macroeconomic modelling

  • Alasdair Scott
  • George Kapetanios
  • Adrian Pagan

A persistent question arising in the development of models for the analysis of macroeconomic policy has been the relative role of economic theory and evidence (data) in their construction. This paper looks at some strategies for transforming a Conceptual Model to become a Data-Adjusted Model, and how to adjust further to an Operational Model for policy analysis. Using a typical dynamic GE small open economy calibrated to UK data, we examine how some simple but formal econometric tests can be applied to test the match of the CM to the data. We also use the CM as a laboratory to assess model-building strategies. Our example suggests that, since one will never be sure that the choice of variables is appropriate, it is better to start with a CM and work towards making it match the data than attempting the converse

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 462.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:462
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