The Getting of Macroeconomic Wisdom

Abstract

As the proverb says, it is wisdom that we want and much of what we do is aimed at acquiring it. On reflection, the acquisition of wisdom is a twostage process. In the first stage ideas are accumulated and explored; in the second those ideas that have withstood the ‘experience test’ are retained and recounted to others as insights. Macroeconometric modelling involves the same dichotomy and it was one that was fruitfully exploited by the Cowles Commission researchers, albeit informally. In the first stage, evidence needs to be assembled and summarized in a convenient and meaningful way, while, in the second, effort is devoted to interpreting the evidence through a set of principles or theories.1 For the Cowles Commission the two stages were represented by the construction of a reduced form and a structure. Thus the distinction has a distinguished history in econometrics. However, all too often it has been ignored and the two stages are blurred together. Indeed, this blurring of the two categories goes back to the very beginnings of macroeconometrics and even features one of the most prominent members of the Cowles Commission, Tjalling Koopmans. The occasion was his famous critique of Burns and Mitchell’s (1947) work on the business cycle.KeywordsBusiness CycleAsset PriceData Generate ProcessMonetary EconomicVector Error Correction ModelThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.