Effects of Exogenous Variables on the Cyclic Properties of an Econometric Model

Abstract

Adequate modelling of the exogenous variables is a very important task for the evaluation of econometric models with respect to both the forecasting properties (Menges (1977)) and the judgement of policy measures. For instance, Goldfeld and Blinder (1972) discussed whether policy variables, generally treated as exogenous, should be treated as endogenous assuming the policymaker pursues an active counter-cyclical policy during the period of investigation. The analysis of the operation of historical stabilization policies requires the estimation and inclusion of systematic reaction patterns in the econometric model. Otherwise, results with regard to the quantitative importance of policy measures may be seriously biased. As Goldfeld and Blinder (1972) stress, the proper inclusion of policy reaction functions can be considered to be more important for judging the relative effectiveness of policies than any structural estimation problem.