Duo Qin

THE ERROR TERM IN THE HISTORY OF TIME SERIES ECONOMETRICS

We argue that many methodological confusions in time-series econometrics may be seen as arising out of ambivalence or confusion about the error terms. Relationships between macroeconomic time series are inexact, and, inevitably, the early econometricians found that any estimated relationship would only fit with errors. Slutsky interpreted these errors as shocks that constitute the motive force behind business cycles. Frisch tried to dissect the errors further into two parts: stimuli, which are analogous to shocks, and nuisance aberrations. However, he failed to provide a statistical framework to make this distinction operational. Haavelmo, and subsequent researchers at the Cowles Commission, saw errors in equations as providing the statistical foundations for econometric models and required that they conform to a priori distributional assumptions specified in structural models of the general equilibrium type, later known as simultaneous-equations models. Because theoretical models were at that time mostly static, the structural modeling strategy relegated the dynamics in time-series data frequently to nuisance, atheoretical complications. Revival of the shock interpretation in theoretical models came about through the rational expectations movement and development of the vector autoregression modeling approach. The so-called London School of Economics dynamic specification approach decomposes the dynamics of the modeled variable into three parts: short-run shocks, disequilibrium shocks, and innovative residuals, with only the first two of these sustaining an economic interpretation.

Money demand in China: The effect of economic reform

Abstract This paper reports an econometric study of Chinas money demand relation, particularly for the period of the economic reforms. With respect to economic theory, two more factors representing transaction demand, additional to the commonly-used GDP or national income, are introduced: the ratio of the growth rates of total savings and loans, to capture the special feature of a centrally planned economy (CPE), and a monetization index to approximate the transitional feature of Chinas economic reforms. With respect to econometric methods, the general→simple dynamic specification modelling approach is adopted to help search for relatively constant relations, using both quarterly data for the period 1978Q1–1991Q4 and annual data for the period 1952–1991. The main findings are: (1) A relatively constant relation of money demand can be found, in spite of the considerable economic changes during the reforms; (2) The constancy is sustained by both the usual market variables, such as GDP and interest rate, and variables characterizing CPEs as well as the reform process; (3) The money demand relation will move towards a standard one in the long run, once the market system dominates; (4) Post-model forecast for 1992 renders satisfactory results; (5) The modelling results support further theoretical and policy studies of transitional economies from central planning towards market.

Rise of VAR Modelling Approach

Abstract This paper surveys the rise of the Vector AutoRegressive (VAR) approach from a historical perspective. It shows that the VAR approach arises from a fusion of the Cowles Commission tradition and time series statistical methods, catalysed by the rational expectations (RE) movement, that the approach offers a systematic solution to the issue of model choice bypassed by Cowles researchers, hence essentially inheriting and enhancing the Cowles legacy rather than abandoning or opposing it. By tackling model choice, however, the VAR approach helps reform econometrics by shifting the research focus from measurement of given theories to identification/verification of data-coherent theories.

Aggregate consumption and income in China: An econometric study

Abstract This paper attempts to improve previous econometric studies of Chinas aggregate household consumption-income relations by adopting the approach of general → simple dynamic specification. An error-correction model is built and fitted with the relevant Chinese data for the period of 1952–1985. A reasonably constant model is obtained. Its theoretical implications are discussed.

Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation

This study provides quarterly time-series estimates of the misalignment in the REER of the Renminbi (RMB). The estimation is based on a commonly used economic approach, but with a wider and more up-to-date coverage of data and a more extensive use of econometric modelling techniques. Our estimates corroborate and explain most of the previous estimates. More importantly, our estimates demonstrate that there is no significant undervaluation in the REER of the RMB though downward misalignment exists in the trilateral rates between the RMB, US

Modelling the Inflation Process in Transition Economies: Empirical Comparison of Poland, Hungary and Czech Republic

and euro. The finding refutes the claim that RMB appreciation is the primary and necessary solution to the current global trade imbalance.

Disequilibrium institutional factors in aggregate money demand: evidence from three economies

This paper starts from the observation that inflation in transition economies appears to be persistently high and volatile and attempts to provide some empirical characterisation of the inflation process in three such transition economies: Poland, Hungary and Czech Republic. We first consider the role of monetary growth as a major causal factor for inflation in these economies, and argue that the evidence provides rather weak support for the causal relationship. We then propose a transition economy cost-plus model and estimate this using the equilibrium-correction modelling (ECM) strategy augmented by introduction of a number of transitory factors and changes in the internal structure of the real economy which we believe may have had a significant impact on inflation in these economies. We show that this approach enables us to account for long-run inflation in these economies from the early 1980s to the present despite the turbulence of the latter part of the sample period. Our results support wage and exchange rate based inflation policies.

Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries

Abstract This paper investigates the disequilibrium effects of a number of institutional factors on the aggregate money demand behaviour of three Asian economies: Japan, Korea and Singapore. It identifies these institutional factors with strong government interventions through monetary or fiscal policies. The investigation is carried out through progressive model search following the equilibrium-correction modelling (ECM) approach. The findings confirm to the arguments that undesirable empirical results from the ECM procedure, such as residual (unconditional or conditional) heteroscedasticity or coefficient non-constancy, are most probably symptoms of the missing variable problem in the underlying theoretical model, and that extension of the theoretical model accordingly to include certain institutional factors pertaining to the particular economies under investigation can enhance the significance of the empirical studies in a substantial way.

The Phillips Curve from the Perspective of the History of Econometrics

This study explores a new modelling approach that bridges the gap between multilateral country-level data and the bilateral-model based, goods-market specific purchasing power parity (PPP) hypothesis. Under this approach, PPP is embedded in latent common factors, extractable from a large set of bilateral price disparities, and tested via an error-correction model where the factors act as error-correction leading indicators for exchange rate and inflation. Significant modelling results for five OECD countries using monthly data suggest that the extant finding of insignificant PPP using similar data should be due to errors-in-variables attenuation and that its correction lies in effective construction of latent variables.

How much does excess debt contribute to currency crises? the case of Korea

This paper examines the history of econometrics through a particular case study - modelling the tradeoff between inflation and unemployment. It focuses on the questions of what econometric tools modellers would choose to model the tradeoff, how their choices helped shape the ways that they obtained, interpreted and theorised the empirical evidence and how their different concerns and the different problems that they encountered has fed back into the development of econometrics. The study reveals that much of the interaction between econometrics and economics involved modellers taking certain tradeoffs between theory and data, and their different positions generated disputes, factions as well as confusions. It also reveals that the history of modelling the tradeoff mirrors the evolving process of how the Cowles structural modelling paradigm in econometrics became consolidated, challenged, reformed or abandoned.This essay examines the history of econometrics through a case study of the Phillips curve, that is, econometric modeling of the trade-off between inflation and unemployment. It focuses on a number of questions: What econometric tools did modelers choose to use in modeling the Phillips curve? How did their choices shape the ways that they obtained, interpreted, and theorized the empirical evidence? How did the concerns and problems they encountered feed back into the development of econometrics? This study reveals that much of the interaction between econometrics and economics involved modelers making certain trade-offs between theory and data, and their different positions generated disputes, factions, and confusion. It also reveals that the history of econometric modeling of the Phillips curve mirrors the evolving process of how the Cowles structural modeling paradigm has become consolidated, challenged, reformed, or abandoned.