A Monthly Econometric Model of the U. S. Economy

Abstract

GIVEN THE LIMITED AVAILABILITY OF MONTHLY DATA, opinions may differ whether it is feasible to construct a monthly econometric model of the U.S. economy at the present time. There may also be different views regarding the method of constructing a monthly model on time series data. Few economists, however, would disagree with the desirability of having a monthly model if it could be constructed satisfactorily.2 The advantages of having a monthly econometric model are numerous. First, important government policy decisions have often been influenced by the latest change in monthly economic data. A more systematic and rigorous analysis of monthly data through the construction of a monthly econometric model would reduce the hazard in using monthly data in an ad hoc manner as is ususally done. Second, short term forecasts are likely to be more accurate if they are made on a monthly model than on equally good quarterly or annual models. If this is true, then a monthly model can contribute to policy formulation in a way in which quarterly and annual models cannot. Third, the application of the Cowles Foundation maximum likelihood simultaneous equation estimating procedures [11] or Theil's k-class estimators [19] to small samples is of uncertain merit, especially with regard to statistical efficiency.3 The Cowles and k-class estimates of the regression coefficients in a system of simultaneous equations merely have the desirable property of consistency for large samples. In a monthly model, there would be much less simultaneity involved in the system of economic relationships than in quarterly or annual models so that the estimation of monthly recursive relationships by the ordinary least squares method would suffer little in inconsistency but would perhaps gain in efficiency. Finally but perhaps more importantly, a recursive monthly model, compared to quarterly and annual models, may involve the least specification error concerning causal directions; and at the same time, it may not give rise to greater serial correlations in the disturbance terms than those involved in models of longer unit periods of observation. This point was argued strongly by one of the authors of the present paper, but it may not be shared by others.4 A test of the feasibility of constructing a monthly econometric model was