Macroeconometric Modelling with a Global Perspective

31 Pages Posted: 20 Jan 2006

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Ron Smith

Birkbeck College

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann and Weiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, x*it, 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 x*it 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

JEL Classification: C32, E17, F37, F42

Suggested Citation

Pesaran, M. Hashem and Smith, Ron P., Macroeconometric Modelling with a Global Perspective (February 2006). IEPR Working Paper No. 06.43, CESifo Working Paper Series No. 1659, Available at SSRN: https://ssrn.com/abstract=877204

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

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United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Ron P. Smith

Birkbeck College ( email )

Malet Street
London WC1E 7HX
United Kingdom
+44 207 631 6413 (Phone)
+44 207 631 6416 (Fax)

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