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The Getting of Macroeconomic Wisdom
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The Getting of Macroeconomic Wisdom

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  • Adrian Pagan

Abstract

The paper discusses a number of trends in the use of macro-economic models for acquiring information about the macro-economy. It is argued that a fundamental distinction should be drawn between models that are constructed to summarise the data and those which are used to interpret the data. By and large the former are statistical and so are judged on the basis of how well they fit the data. Nevertheless, while we have leaned a lot about the nature of macroeconomic data from the large number of statistical models that have emerged to carry out this task, we demonstrate that some of the perceived features may not stand up to a sustained investigation. In particular, it is argued that graphical analysis can often throw doubt upon certain conclusions stemming from formal statistical inference. The second part of the paper turns to models that have been set up with the aim of interpreting macroeconomic data. These are economic in nature, and represent stories that we tell about economic interactions with a view to understanding the origin of observable data characteristics. Given this orientation, goodness of fit is not regarded as the only criterion for assessing their success. Consequently, issues arise over how one can compare such models. A range of methods has evolved for ascertaining whether the proposed story is a good description of the data. We review these methods as well as making some suggestions about how one might improve on them.

Suggested Citation

  • Adrian Pagan, 1999. "The Getting of Macroeconomic Wisdom," CEPR Discussion Papers 412, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    • Handle: RePEc:auu:dpaper:412
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    File URL: https://www.cbe.anu.edu.au/researchpapers/CEPR/DP412.pdf
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    2. Valle e Azevedo, João, 2007. "Interpretation of the Effects of Filtering Integrated Time Series," MPRA Paper 6574, University Library of Munich, Germany.
    3. Cagas, Marie Anne & Ducanes, Geoffrey & Magtibay-Ramos, Nedelyn & Qin, Duo & Quising, Pilipinas, 2006. "A small macroeconometric model of the Philippine economy," Economic Modelling, Elsevier, vol. 23(1), pages 45-55, January.
    4. João Valle e Azevedo, 2002. "Business Cycles: Cyclical Comovement Within the European Union in the Period 1960-1999. A Frequency Domain Approach," Working Papers w200205, Banco de Portugal, Economics and Research Department.
    5. Mr. Gene L. Leon & Serineh Najarian, 2003. "Asymmetric Adjustment and Nonlinear Dynamics in Real Exchange Rates," IMF Working Papers 2003/159, International Monetary Fund.
    6. Breunig, Robert V & Pagan, Adrian R, 2004. "Do Markov-switching models capture nonlinearities in the data?," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 64(3), pages 401-407.
    7. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.

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