Macroeconometric Modelling with a Global Perspective

M Hashem Pesaran () and Ronald Smith ()

No 06.43, IEPR Working Papers from Institute of Economic Policy Research (IEPR)

Abstract: This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann andWeiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, xit, and then consistently combined to form a Global VAR (GVAR). It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where xit variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. This approach has been used in a wide variety of contexts and for a wide variety of purposes. The paper also provides some new results.

Keywords: Global VAR (GVAR); DSGE models; VARX (search for similar items in EconPapers)
JEL-codes: C32 E17 F37 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
Date: 2006-01
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http://www.usc.edu/dept/LAS/economics/IEPR/Working ... Pesaran,Smith%5D.pdf First version, 2006 (application/pdf)

Related works:
Working Paper: Macroeconometric Modelling with a Global Perspective (2006)
Working Paper: Macroeconometric Modelling with a Global Perspective (2006)
Journal Article: MACROECONOMETRIC MODELLING WITH A GLOBAL PERSPECTIVE (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:scp:wpaper:06-43

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