A common model approach to macroeconomics: using panel data to reduce sampling error

Abstract

Is there a common model inherent in macroeconomic data? Macroeconomic theory suggests that market economies of various nations should share many similar dynamic patterns; as a result, individual-country empirical models, for a wide variety of countries often include the same variables. Yet, empirical studies often find important roles for idiosyncratic shocks in the differing macroeconomic performance of countries. We use forecasting criteria to examine the macro-dynamic behavior of 15 OECD countries in terms of a small set of familiar, widely–used core economic variables, omitting countryspecific shocks. We find this small set of variables and a simple VAR “common model” strongly supports the hypothesis that many industrialized nations have similar macroeconomic dynamics.