The Unconventional Dynamics of Economic and Financial Aggregates
Posted: 19 Mar 2012
Date Written: March 17, 2012
Time series models have provided econometricians with a rich toolbox to choose from. Linear ARIMA models have been very influential and have enhanced our understanding of many empirical features of economics and finance. As with any scientific endeavour, data have emerged that show the need for refinements and improvements over existing models.
Nonlinear models have gained popularity in recent times, but which one do we choose from? Once we move away from linear models, there is a huge variety on offer. Surely, economic theory should provide the guiding light, insofar as economics and finance are the subject in question. Abadir and Talmain (2002), Review of Economic Studies, provided one possible answer. This is mainly a summary of the econometric aspects of the line of research started by that paper.
The main result of that literature is that macroeconomic and aggregate financial series follow a nonlinear long-memory process that requires new econometric tools. It also shows that integrated series (which are a special case of the new process) are not the norm in our subject, and proposes a new approach to econometric modeling.
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