The Italian continuous time model: Theory and empirical results

Abstract

The use of continuous time macroeconometric models (ie models specified as systems of stochastic differential equations and estimated in continuous time) has important advantages not only from the point of view of pure theory but also from the point of view of practical application. In this paper we give a detailed exposition of the fifth version of our model, which is specified as a set of 24 non-linear stochastic differential equations, and examine its qualitative properties (steady state solution, structural stability etc). We then present the estimation results, with particular emphasis on adjustment speeds and sensitivity analysis. Finally, we examine the in sample and out of sample predictive performance of the model.