Large-scale macroeconometric model

Following the development of Keynesian economics, applied economics began developing forecasting models based on economic
data including national income and product accounting data. In contrast with typical textbook models, these large-scale
macroeconometric models used large amounts of data and based forecasts on past correlations instead of theoretical relations. These
models estimated the relations between different macroeconomic variables using regression analysis on time series data. These
models grew to include hundreds or thousands of equations describing the evolution of hundreds or thousands of prices and quantities
over time, making computers essential for their solution. While the choice of which variables to include in each equation was partly
guided by economic theory (for example, including past income as a determinant of consumption, as suggested by the theory of
adaptive expectations), variable inclusion was mostly determined on purely empirical grounds. Large-scale macroeconometric model
consists of systems of dynamic equations of the economy with the estimation of parameters using time-series data on a quarterly to
yearly basis.

Macroeconometric models have a supply and a demand side for estimation of these parameters. Kydland and Prescott call it the
system of equations approach.[1] Large-scale macroeconometric model can be defined as a set of stochastic equations with
definitional and institutional relationships denoting the behaviour of economic agents. The supply side determines the steady state
properties of the macroeconometric model. The macroeconometric model designed by the model builder is significantly influenced
by his interests, information, purpose behind its construction, time and financial constraints in the research. The size and nature of the
model will change because of the above considerations while building the same. According to Pesaran and Smith the
macroeconometric model must have three basic characteristics viz. relevance, adequacy and consistency.[2] Relevance means the
model must be according to the requirements of the desired output. Consistency will expect the model to be inline with the existing
theory and inner working of the described system. Adequacy explains the model to be better in terms of its predictive performance.
The main objective of the model decides its size. In the current scenario there is an increasing interest in the use of these large-scale
[3]
macroeonometric models for theory evaluation, impact analysis, policy simulation and forecasting purposes.

Large-scale macroeconometric models were criticized by Robert Lucas in his critique. Lucas argued that models should be based on
theory, not on empirical correlations. He said that empirical correlations were sensitive to policy changes, and only a model based on
theory could account for shifting policy environments. Lucas and other new classical economistswere especially critical of the use of
large-scale macroeconometric models to evaluatepolicy impacts when they were purportedly sensitive to policy changes.

Tinbergen developed the first comprehensive national model, which he first built for the Netherlands and later applied to the United
States and the United Kingdom after World War II. The first global macroeconomic model, Wharton Econometric Forecasting
Associates' LINK project, was initiated by Lawrence Klein. The model was cited in 1980 when Klein, like Tinbergen before him,
won the Nobel Prize in Economics. Large-scale empirical models of this type, including the Wharton model, are still in use as of
2011, especially for forecasting purposes.[4][5][6]

Contents
List
See also
References
Further reading

List
 MFMod – World Bank
Project LINK at Wharton
MIT-Penn-Social Science Research Council

See also
Macroeconomic model
Time series
Lucas critique
Dynamic stochastic general equilibrium
Consensus forecast

References
1. Kydland, Finn E.; Prescott, Edward C. (1991). "The Econometrics of the General Equilibrium Approach to Business
Cycles". The Scandinavian Journal of Economics. 93 (2): 161–178. JSTOR 3440324 (https://www.jstor.org/stable/34
40324).
2. Pesaran, M. H.; Smith, R. P. (1985). "Evaluation of Macroeconometric Models".Economic Modelling. 2 (2): 125–134.
doi:10.1016/0264-9993(85)90018-5(https://doi.org/10.1016%2F0264-9993%2885%2990018-5) .
3. http://www.arts.pdn.ac.lk/econ/ejournal/v1/v1-ananda-jayawickreme-article.pdf
4. Klein, Lawrence R., ed. (1991).Comparative Performance of US Econometric Models
. Oxford University Press.
ISBN 0-19-505772-4.
5. Eckstein, Otto (1983). The DRI Model of the US Economy. McGraw-Hill. ISBN 0-07-018972-2.
6. Bodkin, Ronald; Klein, Lawrence; Marwah, Kanta (1991).A History of Macroeconometric Model Building
. Edward
Elgar. ISBN 1852783699.

Further reading
Brown, T. Merritt (1970). Specification and Uses of Econometric Models. London: Macmillan. ISBN 0-333-07411-4.
Desai, Meghnad (1976).Applied Econometrics. New York: McGraw-Hill. pp. 233–268.ISBN 0-07-016541-6.
Epstein, Roy J. (1987). "The Emergence of Structural Estimation".A History of Econometrics. Amsterdam: Elsevier.
pp. 47–78. ISBN 0-444-70267-9.
Malgrange, Pierre; Muet, Pierre-Alain, eds. (1984). Contemporary Macroeconomic Modelling. Oxford: Blackwell.
ISBN 0-631-13471-9.
Naylor, Thomas H.; Boughton, James M. (1971). Computer Simulation Experiments with Models of Economic
Systems. New York: Wiley. pp. 126–152. ISBN 0-471-63070-5.
Wynn, R. F.; Holden, K. (1974). An Introduction to Applied Econometric Analysis. London: Macmillan. pp. 105–175.
ISBN 0-333-16711-2.

Retrieved from "https://en.wikipedia.org/w/index.php?title=Large-scale_macroeconometric_model&oldid=780400292

"

This page was last edited on 14 May 2017, at 21:10.

Text is available under theCreative Commons Attribution-ShareAlike License ; additional terms may apply. By using this
site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of theWikimedia
Foundation, Inc., a non-profit organization.