A Presentation of the Italian Continuous Time Model

Abstract

The use of continuous-time dynamic macroeconometric models (i.e., models specified as systems of stochastic differential equations and estimated in continuous time) in economics has important advantages not only from the point of view of pure theory but also from the point of view of policy applications. Nine years ago we set out to build and estimate a continuous time macrodynamic model of the Italian economy, which has gone through several revisions: the present one is the fifth version and has been completed in December 1987. In this paper, after giving an overview of the model, we show that it has good qualitative properties (i.e., it possesses an economically meaningful steady-state solution which, in addition, is structurally stable in the sense of Andronov et al) and then show the estimation results. Finally, we show some policy applications of the model.