The Econometrics of. Macroeconomic Modelling

At the European Meeting of the Econometric Society in Santiago de Compostela in September 1999, Clive Granger asked if we would like to write a book for the Advanced Texts in Econometrics series about the approach to macroeconometric modelling we had adopted at the Research Department of Norges Bank over the past 15 years. It has taken us 5 years to comply with his request, and the result is found within these covers.

This book is about building models by testing hypotheses of macroeconomic theories-rather than by imposing theories untested. This is quite a crucial distinction in macroeconometric model building. For an empirical model to be useful, be it as a basis for economic policy decisions or for forecasting, it needs to describe the relevant aspects of reality. Simplification is the main virtue of theoretical model building. In empirical modelling it might easily become a vice. A theoretical model is often reduced to just those equations that are required to make it work for the problem at hand. A good empirical model should also be able to explain problems that might occur. Einstein’s advice that ‘everything should be as simple as possible... but no simpler’ is as relevant as ever. If a model does not describe the data, it may just be too simple to be used as a tool for macroeconomic decision making.

The main target group for the book is researchers and practitioners of macroeconomic model building in academia, private agencies and governmental services. As a textbook it can be used in graduate courses on applied macro­econometrics in general and—more specifically—in courses focusing on wage and price formation in the open economy. In that context it is obvious that a companion text on econometric methods and practice will be useful, and we recommend Dynamic Econometrics by David F. Hendry (Hendry 1995a) and Empirical Modeling of Economic Time Series by Neil R. Ericsson (Ericsson 2005) for this purpose.

The work on the book has formed a joint research agenda for the authors since its conception. Hence, we draw extensively on our published papers, many of which was written with the demands of this book in mind: Section 1.4 and Chapter 2 are based on Jansen (2002); Sections 5.6 and 6.7.2 on Bardsen et al. (1998); Sections 6.1-6.3 on Kolsrud and Nymoen (1998) and Bardsen and Nymoen (2003); Section 6.8 on Holden and Nymoen (2002) and Nymoen and Rpdseth (2003); Chapter 7 on Bardsen et al. (2004), Section 8.4 on Eitrheim (1998); Chapter 9 on Bardsen et al. (2003); Section 11.2 on Eitrheim et al. (1999, 2002a) and Section 11.3 on Bardsen et al. (2002a).

Also, we have used material from unpublished joint work with other authors. In particular we would like to thank Q. Farooq Akram, Neil R. Ericsson and Neva A. Kerbeshian for their permission to do so: Akram et al. (2003) underlies Chapter 10 and we draw on Ericsson et al. (1997) in Section 4.4.

The views are those of the authors and should not be interpreted to reflect those of their respective institutions. Throughout the book our main econo­metric tools have been the programs developed by Jurgen A. Doornik, David F. Hendry and Hans-Martin Krolzig, i. e., the Oxmetrics package (provided by Timberlake Consultants), in particular PcGive, PcFIML and PcGets. In Chap­ter 7 and Sections 9.5 and 10.3 we have used Eviews (provided by Quantitative Micro Software) and the simulations in Section 11.2.2 are carried out with TROLL (provided by Intex Solutions).

Data documentation, data series, programs and detailed information about the software used are available from a homepage for the book:

http://www. svt. ntnu. nM/iso/macroectrics.

We are indebted to many colleagues and friends for comments, discussions and critisism to the various parts of the book. The editors of the series—Clive W. J. Granger and Grayham E. Mizon—have given us advice and constant encouragement. David F. Hendry and Bjprn E. Naug have read the entire manuscript and given us extensive, constructive and very helpful comments. In addition to those already acknowledged, grateful thanks goes to: Q. Farooq Akram, Olav Bjerkholt, Neil R. Ericsson, Paul G. Fisher, Roger Hammersland, Steinar Holden, Tore Anders Husebp, Kare Johansen, Spren Johansen, Adrian Pagan, Asbjprn Rpdseth, Timo Terasvirta, Anders Vredin, Kenneth F. Wallis, and Fredrik Wulfsberg. Last, but not least, we are indebted to Jurgen A. Doornik for his generosity with both time, patience, and effort throughout the project.

While working on the book Gunnar Bardsen has visited the School of Economics and Finance, Queensland University of Technology (November 2000-January 2001) and Department of Economics, University of California San Diego (March 2003), and Eilev S. Jansen has been a visitor at Department of Economics, University of Oslo (August 2001-January 2003), DG Research, European Central Bank, Frankfurt (February 2003-June 2003) and Department of Economics, University of California San Diego (August 2003-July 2004). The hospitality and excellent working conditions offered at those institutions are gratefully acknowledged.

Finally, we are grateful to our respective employers—Norges Bank, Norwegian University of Science and Technology, and University of Oslo—for allocating resources and time for this project. That said, the time spent on the book has often gone beyond normal hours, which is but one reason why this book is dedicated to our wonderful and wise wives.

Trondheim/Oslo, November 2004 Gunnar Bardsen, 0yvind Eitrheim, Eilev S. Jansen and Ragnar Nymoen


Macroeconometric modelling is one of the ‘big’ projects in economics, dating back to Tinbergen and Frisch. This introductory chapter first discusses the state of the project. We advocate the view that, despite some noteworthy setbacks, the development towards more widespread use of econometric models, is going to continue. However, models change as research progresses, as the economy develops, and as the demand and needs of model users change. We point to evidence of this kind of a, d,a, pt - ive changes going on in current day macroeconometric models. We then discuss the aspects of the macroeconometric modelling project that we have contributed to in our own research, and where in the book the different dimensions and issues are presented.

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