THE ECONOMETRICS OF MACROECONOMIC MODELLING

Testing the specification

The main tools of evaluation of models like the NPCM have been the GMM test of validity of overidentifying restrictions (i. e. the xj-test earlier) and measures and graphs of goodness-of-fit.9 Neither of these tests is easy to interpret. First, the xj may have low power. Second, the estimation results reported by GG and GGL yield values of bp1 + bp1 close to 1 while the coefficient of the wage share is numerically small. This means that the apparently good fit is in fact no better (or worse) than a model in the double differences (e. g. a random walk); see Bardsen et al. (2002b). There is thus a need for other evaluation methods, and in the rest of this chapter we test the NPCM specification against alternative models of the inflation process.