Notes on Dynamic Macroeconometric Models (PEC11_9) 1

The structural form of an econometric model explains a set of endoge-nous variables on the basis of some simpli\u85ed economic theory. While the underlying macroeconomic model can at most impose qualitative or sign restrictions on the relevant parameters (e.g. zero, positive, negative), the purpose of an econometric model is measuring these parameters and testing how appropriate the restrictions are vis-à-vis sample information. In the seminal Cowles Commission approach (Koopmans), forecasting and policy evaluation are the most typical usages of econometric models. More recently, econometric forecasting have been challenged by developments in time series analysis while policy evaluation has been criticized by develop-ments in dynamic macroeconomic theory, mostly due to Lucas, Sargent, Sims and Prescott. In the classical Cowles Commission approach, each endogenous variable depends on few other endogenous and exogenous variables to comply with a number of a priori assumptions excluding that everything depends on every-thing else (PEC11_7). The fact that the endogenous variables typically depend on other endogenous variables implies a simultaneity problem which makes inconsistent OLS estimates. Similarly, only a few exogenous variables a¤ect the same endogenous vari-able because exogenous variables too have a selective inuence, reecting theoretical restrictions which are needed to identify the model. Finally, the exogenous variables are treated as deterministic controls that dont have to be estimated. The Cowles Commission econometric models di¤er from the prototypical macroeconomic model in the fact that parameters