Large Macroeconomic Models Research Articles

The Effect of Mutualization and Collateralization on Credit Default Swaps Premium

This paper examines the effect of collateralization and mutualization (of losses) on credit default swaps (CDS) premium in a context of high counterparty risk operating through an opaque derivatives market. This setup certainly makes clearing practices to affect the size of positions, recovery rate and premium. This model not only has the benefit of being realist to the light of causes and propagation of great recession but also to assessing clearing practices in a partial equilibrium. I closely follow contributions of Koeppl and Monnet, Koeppl, Acharya and Bisin and Stephens and Thompson. I show that premium is high when mutualization takes place as clearing policy; the new allocation is characterized by a high recovery rate and low risk premium as fully-insured contracts spread significantly relative to OTC markets. The risk premium ebbs as different type of default-fund calls flow into the clearinghouse. The aforementioned pushes down the premium, however it does not offset the upward effect stemming from the increasing recovery rate. Additionally, as literature suggests collateralization avoids default, premium is high and the value of the position (or recovery rate) increases. In these contracts the risk premium is low too. This research contributes to compress insurance pricing theory into a material that may be a critical input in large macroeconomic models.

Searching for a Theory That Fits the Data: A Personal Research Odyssey

This survey paper discusses the Cointegrated VAR methodology and how it has evolved over the last 30 years. first section is a description of major steps in the econometric development of the CVAR model that facilitated serious real world applications. next three sections are primarily methodological and discuss (i) difficulties and puzzles when confronting theory with the data, (ii) the formulation of a viable link between theory and the data, a so called theory-consistent CVAR scenario, and (iii) how all this was inspired by Trygve Haavelmo and his Nobel prize winning monograph The Probability Approach to Economics. next two sections discuss early applications of the Cointegrated VAR model to monetary transmission mechanisms, international transmission mechanisms and wage, price and unemployment dynamics. They report puzzling evidence, discuss the need for new theory, and propose a method for combining partial CVAR analyses into a larger macroeconomic model. following sections propose a new, empirically-based, approach to macroeconomics in which imperfect knowledge based expectations replace so called rational expectations and in which the financial sector plays a key role for understanding the long persistent movements in the data. last section argues that the CVAR can act as a design of experiment for passive observations and illustrates with several applications including unemployment dynamics under crises periods and aid effectiveness in South Saharan African countries.

Macroeconomic Model Spillovers and Their Discontents

The Great Recession underlined that policies in some countries can have profound spillovers elsewhere. Sadly, the solution of simulating large macroeconomic models to measure these spillovers has been found wanting. Typical models generate lower international correlations of output and financial asset prices than are seen in even pre-crisis data. Imposing higher financial market correlations creates more reasonable cross-country spillovers, and is likely to become the norm in policy modeling despite weak theoretical underpinnings, as is already true of sticky wages. We propose using event studies to calibrate market reactions to particular policy announcements, and report results for U.S. monetary and fiscal policy announcements in 2009 and 2010 that are plausible and event-specific.

Botanising in a Sinocentric world: Robert Fortune's travels in China

This article will discuss the writings of Robert Fortune (1812–80), a Scottish plant collector who travelled in China during the 1840s and 1850s. After the First Opium War (1839–42), trade with China flourished and as European travellers, merchants, and missionaries moved inland, long-held views about China were both confirmed and contested. Fortune's travel books provide important insights into changing British attitudes towards China during this formative period, and often express highly conflicted and ambivalent views towards imperialism. This article will suggest that Fortune's writing can best be interpreted within the dynamic context of ‘informal imperalism’ and ultimately within a larger macroeconomic model of a Sinocentric economy. As one of the best known Victorians to travel to the Far East, his writing sheds light on the ways in which mid-nineteenth-century Britons imagined the very limits of empire.

Bref aperçu d’un modèle à forme réduite de prévision de la dépense nationale brute au Canada

This paper presents a critical evaluation of a St-Louis type monetarist reduced-form model for Canada. The model centres on two equations estimated over the 1957-1977 sample period. An expenditure equation relates the growth of nominal GNE to the rate of monetary expansion and to changes in autonomous expenditure. The split between real growth and inflation is modelled through a simple Phillips curve with adaptive expectations. The dynamic properties of the model are discussed, and illustrated with simulations of alternative monetary growth paths. The analysis reveals some disturbing characteristics of this type of model. For instance, the responses of GNE to money supply changes or to price shocks are not symmetrical though both represent the same shock to real money supply. The price response to a monetary shock, while more plausible than in most large macroeconomic models, remains inadequate since increased monetary expansion results in higher real money supply accompanying higher inflation. The author nevertheless leaves the impression that reduced form models are a useful starting point for econometric research; their limitations are only an invitation to further refinements.

Identifying endogenous fiscal policy rules for macroeconomic models

The forecast and policy simulations based on macroeconomic models are used in many instances as an important input into policy decision-making. In this paper, we present a model-based method for identifying fiscal closure rules in stochastic macroeconomic models. The methodology is based on the stability analysis of the model at hand, with an endogenous derivation of a reaction on the part of the fiscal authority to state variables in the model. The rule achieves the dual aim of imposing solvency on the fiscal sector and generating a state-contingent dynamic adjustment in a framework consistent with the properties of the model. The approach differs from the standard practice of deriving fiscal closure rules in large macroeconomic forecasting models in both its derivation and implementation. An example of the endogenously derived rule, including some illustrative results, is provided using a small calibrated macro model

Dynamic portfolio models with long-term restrictions

Dynamic portfolio models have obtained a prominent place in the economic literature. As a rule, the problem of implausible long-term coefficients is ignored. In particular the long-term interest rate parameters are not in accordance with the theory of gross substitution. This shortcoming is especially serious when such a portfolio model is used as part of a larger macroeconomic model. A standard estimation-under-restriction procedure cannot be applied as these long-term coefficients are nonlinear functions of short-term interest rate coefficients and of the coefficients of the adjustment process. This paper introduces a new estimation procedure, which is used to estimate portfolio models for households and banks in The Netherlands.

Rational expectation variables in macroeconomic models: Empirical evidence for the Netherlands and other countries

Rational expectations have obtained a prominent place in economic theory and econometric model building. However, this holds more for small, theoretical models than for large macroeconomic models. This paper deals with the introduction of rational expectation variables in MORKMON II, a macroeconomic model of the Dutch economy. Model equations with rational expectations are reestimated. Policy and impulse simulations are used to compare the adaptive expectation variant with the rational expectation variant of MORKMON II. It is found that rational expectations constitute a plausible alternative to adaptive expectations, but that the simulation effects only differ in the short run and in case of announcement effects. This result agrees with the findings of an international survey of macroeconomic models with rational expectations, that simulation effects generally differ little when equations with rational expectations are reestimated, but may differ substantially when reestimation has not been carried out.

In Pursuit of a New Paradigm (Presidential Address)

After 40 years of its birth, development economics has come to be widely accepted - without universal acclaim. In sharp contrast to some pessimistic evaluations of the subject, the academic community has granted it the right to a separate existence. But the recognition has not come easy. From the first full-length evaluation of the discipline by Chenery (1965), in which he looks at it as a variation on the classical theme of comparative advantage, to Stem's (1989) sympathetic review of the contributions that the discipline has made to the state of economic knowledge, development economics has experienced many a vicissitude - both the laurels of glory and the "arrows of outrageous fortune". But, finally, it has become an industry in its own right, of which not only social profitability but also 'private' profitability appears to be strictly positive: the publishing industry continues to patronize it and publish full-length books on the subject. Four decades of development experience, the production of massive cross-country and time-series data about a large number of development variables, the construction of large macro-economic models and fast-running computers, and the application of mathematical methods, have all combined to lay the foundations of a theoretically rigorous and policy-relevant development paradigm, which is gradually replacing the old one. All this is good news for development economists, who can now afford not only bread but also some butter for their daily parsnips .

Specification, Estimation, and Analysis of Macroeconomic Models

This book gives a practical, applications-oriented account of the latest techniques for estimating and analyzing large, nonlinear macroeconomic models. Ray Fair demonstrates the application of these techniques in a detailed presentation of several actual models, including his United States model, his multicountry model, Sargent's classical macroeconomic model, autoregressive and vector autoregressive models, and a small (twelve equation) linear structural model. He devotes a good deal of attention to the difficult and often neglected problem of moving from theoretical to econometric models. In addition, he provides an extensive discussion of optimal control techniques and methods for estimating and analyzing rational expectations models.A computer program that handles all the techniques in the book is available from the author, making it possible to use the techniques with little additional programming. The book presents the logic of this program. A smaller program for personal microcomputers for analysis of Fair's United States model is available from Urban Systems Research & Engineering, Inc. Anyone wanting to learn how to use large macroeconomic models, including researchers, graduate students, economic forecasters, and people in business and government both in the United States and abroad, will find this an essential guidebook.

Alternative specifications of the demand for money and their implications for forecasting and policy analysis with large macroeconomic models

The demand for money is an important function in large macroeconomic models because of its central role in monetary policy. The interest rate responsiveness of money demand determines the interest rate changes consistent with the initial change in monetary policy and the subsequent changes on aggregate demand and the price level. This paper uses the DRI macroeconometric model to investigate these issues, finding that the model's predictive power and its estimates of the relative potency of monetary and fiscal policy are dependent upon the specification of the money demand function.

An improved solution technique for large economic models with consistent expectations

Rational expectations, when applied to the large macro-economic models, implies that the expectation of a variable must be the same as the eventual model forecast of that variable. This has presented large model users with some particular problems as the traditional model solution techniques are not capable of solving such models. Currently two different approaches have been used to solve this problem. These are described by Holly and Zarrop (1983) and Fair (1979). This note describes the technique which has been implemented as part of the National Institute's model solution software (NIMODEL); the technique is a simple extension of the traditional Gauss-Seidel solution technique; it appears to offer a considerable increase in efficiency and reliability.

An analysis of some possible causes for the absence or presence of the neutrality and homogeneity properties in large macroeconomic models

Using a simple integrated Keynesian-Monetarist model, this paper highlights some of the major factors which hinder the large Canadian macroeconomic models from achieving the neutrality and homogeneity properties. An analysis of these factors reveals that, whereas the large models can be modified to produce the neutrality property, it can not be expected that these models also demonstrate the homogeneity property, i.e. that change in the money supply be fully reflected in changes in nominal GNE.

The maintenance of large macro-economic models: a case study with the NIESR model of the UK economy

The maintenance of large macro-economic models: a case study with the NIESR model of the UK economy

Use of Formal Manipulations to Solve Large Macroeconomic Models

Use of Formal Manipulations to Solve Large Macroeconomic Models

Macro-Economic Model Simulation and Software In Moduleco

Moduleco is a time-sharing system specialized on simulation and optimization of large macro-economic models (1 000 equations). These models are deterministic, non linear and written as ft(xt,xt−1,....,xt−p)=0.​​​​​​​Α MODULECO user disposes of a new modelling language. The software translates the equations into an internal code which is used by the simulation and optimization algorithms.We hereby present the simulation results obtained on these kinds of models and an example of simulation using the MODULECO language.Simulation methods adapted to the particularities of an economic model matrix have been used. These methods were developed by the MODULECO team. Experience with them has shown that we obtain better matrix decomposition and resolution times.The Moduleco language provides a set of basic commands and an extension mechanism. The user has the possibility of combining existing commands under the control of a program. Such a program may later be defined as a new command in Moduleco. Such a program as well as the command language are interpreted. A new command may also be defined by giving reference to a program written in a programming language.The calling of such a command at the terminal will result in the execution of the associated program.

Incorporation of General Economic Outcomes in Econometric Projections Models for Agriculture

The AAEA has devoted two invited paper sessions in recent years to the econometric modeling of the farm business sector. A 1974 session dealt with the evaluation of econometric models for the farm business sector as well as for the total economy. Of particular note was the paper presented by Popkin, who cited several approaches to improving price forecasts in macroeconomic models. The attention given to price forecasting in this session was understandable in light of the inordinately high degree of price variability experienced during the 1973-74 period and the inability of existing models to forecast these fluctuations accurately. A 1976 session dealt with the interface in aggregate econometric models between the farm business sector and the general economy. Papers presented by Chen and by Roop and Zeitner emphasized the interaction between farm business sector models and a larger macroeconomic model for the U.S. economy, the Wharton econometric model. One general conclusion stemming from this session was that greater endogenization of nonfarm business outcomes would reduce the error associated with projecting farm business outcomes, and vice versa. In discussing the papers presented in the 1976 session, Johnson alluded to the need to use functional relationships instead of identities when accounting for linkages between the economic sectors of an economy. Just further argued that sector econometric models must reflect the major interfaces with the general economy. The output, input, and international trade linkages he cites, however, represent only -part of the interface between the farm business sector and the general economy. Conspicuous by its absence is the linkage between the bond and equity capital markets, financial intermediaries, and the cost and availability of loan funds to finance farm business operating expenses and capital accumulation. Also missing are most of the channels through which changes in national economic policy stimulate and direct the growth of the total economy.

Hypothesis-Testing in the Large Macro-Economic Models

Hypothesis-Testing in the Large Macro-Economic Models

A MACROECONOMIC MODEL OF HOUSEHOLD ASSET CHOICE*

s of Doctoral Dissertations 1181 price-level changes are found to have a significant positive effect on additions to the stock of life insurance, indicating that households may try to maintain some degree of real protection. The major aspect of corporate-stock holdings investigated in the dissertation concerns reallocative effects brought about by capital gains or losses. In several cases these effects prove substantial. Explaining net investment in corporate stock proved difficult, although rough results suggest that net investment is postively related to expected yields (including both capital gains and dividends) and to the expected price-level change. Several less-important assets and liabilities (federal securities, state and local obligations, security credit, etc.) are also examined, but less comprehensively. Since the markets for many of these items tend to be dominated (at least on the margin) by institutions outside the household sector, statistical results in this section are inferior to the results for other markets. In addition to carrying out a disaggregated study of the assets and liabilities mentioned above, the dissertation investigates aggregate savings behavior from several perspectives. The results stand in general agreement with the large number of other studies undertaken in this area. Since the dissertation presents a complete treatment of savings behavrior in the household sector, it is hoped that the analysis eventually can be integrated at least in part into one or another of the large macroeconomic models that incorporate detailed structural links between the real and financial sectors of the economy. This content downloaded from 207.46.13.57 on Sat, 10 Sep 2016 04:25:51 UTC All use subject to http://about.jstor.org/terms

ESTIMATES OF HICKSIAN IS AND LM CURVES FOR THE UNITED STATES*

THERE ARE MORE FACTS AROUND than there are theories capable of explaining. But, while a theory should be capable of explaining a large number of facts in order to be useful, it is generally supposed that theories should not try to explain all of the facts relevant to their domain. This is because the theory, if it permits of no exceptions whatsoever, is necessarily as complex as the set of facts it is designed to explain. Current developments in the field of macroeconomic model building provide a case in point. On the one hand, there is the momental work of Professor Friedman on the influence of changes in the stock of money on the aggregate level of economic activity. It is testimony to his perseverance and the merit of his findings that many economists now protest that they never meant to imply that money didn't matter. The direct evidence that he has provided has undeniably made its mark, and the efforts of many economists are now directed toward uncovering evidence of variables other than the money supply that matter significantly. On the other hand, a magnificent chain of developments following in the heritage of Tinbergen has led to the construction of large and elaborate macroeconomic models. It is a living tribute to the ingenuity and creativity of men like Klein, Goldberger, Suits, and others, that the Brookings-SSRC model of the economy of the United States has been constructed.' But, this model has not been constructed without some misgivings, misgivings that reflect serious concern over the problems of complexity that are bound to arise whenever a model contains hundreds of equations.2 The model to be presented here, stemming from Hicks,3 could perhaps be