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Deciding Between Alternative Approaches In Macroeconomics

David Hendry ()

No 778, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract: Macroeconomic time-series data are aggregated, inaccurate, non-stationary, collinear and rarely match theoretical concepts. Macroeconomic theories are incomplete, incorrect and changeable: location shifts invalidate the law of iterated expectations and ‘rational expectations’ are then systematically biased. Empirical macro-econometric models are non-constant and mis-specified in numerous ways, so economic policy often has unexpected effects, and macroeconomic forecasts go awry. In place of using just one of the four main methods of deciding between alternative models, theory, empirical evidence, policy relevance and forecasting, we propose nesting ‘theory-driven’ and ‘datadriven’ approaches, where theory-models’ parameter estimates are unaffected by selection despite searching over rival candidate variables, longer lags, functional forms, and breaks.

Keywords: Model Selection; Theory Retention; Location Shifts; Indicator Saturation; Autometrics. (search for similar items in EconPapers)
JEL-codes: C51 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-for
Date: 2016-01-27
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Journal Article: Deciding between alternative approaches in macroeconomics (2018) Downloads
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