Nonstationary Time Series Analysis and Cointegration

By Colin P. Hargreaves | Go to book overview

8
Evaluating a real business cycle model

Fabio Canova, Mary Finn and Adrian R. Pagan*

Most real business cycle models have been assessed by studying the correspondence of their predictions to a set of stylised facts. This paper argues that such tests are not extensive enough and proposes to evaluate the models using standard econometric procedures. Specifically it is argued that these models should be studied by eliciting the restricted VAR representation underlying them and comparing it with the VAR estimated in an unrestricted way from the underlying data. Allowance is made for cases where the driving forces are integrated and when they are stationary. When forces such as technology shocks are integrated these models produce a specific set of predictions about the cointegrating vectors as well as a set of restrictions upon the dynamics. The approach is illustrated using a real business cycle model estimated by Burnside, Eichenbaum and Rebelo. This model has been subjected to some formal testing based upon stylised facts, and it therefore seems an appropriate one upon which to utilize the formal econometric procedures.


1. INTRODUCTION

In the last decade, real business cycles (RBC) models have gone from the preliminary explorations of Long and Plosser ( 1983) and Kydland and Prescott ( 1982) to well developed and tested models such as Burnside, Eichenbaum and Rebelo ( 1993) and McGrattan ( 1991). Early models could be regarded as 'idealised', in the sense adopted in the philosophical literature summarised in

____________________
*
Financial support from the U.K. Economic and Social Research Council under grant R000233447 is gratefully acknowledged by both authors. We are indebted to Neil Ericsson for helpful comments.

-225-

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Nonstationary Time Series Analysis and Cointegration
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • List of Figures vii
  • List of Tables xiii
  • List of Contributors xv
  • Foreword xvii
  • 1 - Introduction 1
  • References 8
  • 2 - Towards a Theory of Economic Forecasting 9
  • Appendix 48
  • References 50
  • 3 - Bayes Models and Forecasts of Australian Macroeconomic Time Series 53
  • References 86
  • 4 - A Review of Methods of Estimating Cointegrating Relationships 87
  • References 129
  • 5 - A Test of the Null Hypothesis of Cointegration 133
  • References 151
  • 6 - Modelling Seasonal Variation 153
  • References 176
  • 7 - Cointegration, Seasonality, Encompassing, and the Demand for Money in the Uk 179
  • Appendix A. the Data 214
  • Appendix B. Sequential Reduction Analysis 216
  • References 220
  • 8 - Evaluating a Real Business Cycle Model 225
  • Appendix 252
  • References 254
  • 9 - Misspecification Versus Bubbles in the Cagan Hyperinflation Model 257
  • References 281
  • 10 Regime Switching with Time-Varying Transition Probabilities 283
  • Appendix 299
  • References 302
  • Name Index 303
  • Subject Index 307
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