Using Variable Slope Total Derivative Estimations to Pick between and Improve Macro Models

Jonathan Leightner
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Jonathan Leightner: Hull College of Business, AllGood Hall, Summerville Campus, Augusta University, 1120 15th Street, Augusta, GA 30912, USA

JRFM, 2022, vol. 15, issue 6, 1-13

Abstract: Using the same data set, a researcher can obtain very different reduced form estimates just by assuming different macroeconomic models. Reiterative Truncated Projected Least Squares (RTPLS) or Variable Slope Generalized Least Squares (VSGLS) can be used to estimate total derivatives that are not model dependent. These estimates can be used to pick between competing macro models, improve current models, or create new models. A selected survey of RTPLS estimates in the literature reveals several common patterns: (1) as income inequality has surged around the world, the effect of changes in government spending (G), exports (X), and money supply (M-1) on Gross Domestic Product (GDP) have plummeted, (2) decreases in G, X, and M-1 cause GDP to fall more than equal increases in G, X, and M-1 cause GDP to rise, and (3) unusually large increases in G and M-1 cause their effect on GDP to plummet. These common patterns fit with a global glut of savings hypothesis, which predicts that an increase in savings will not cause an increase in production expanding investment. An appropriate model could be built around the idea that investors have a choice between investing to increase production or investing to earn rent or interest.

Keywords: omitted variables bias; total derivatives; choosing between macro models; global glut of savings; Keynesian model; government multipliers; money supply multipliers; export multipliers; production expanding investment; investment to own or rent (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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