Longrunmodelsineconomics.pptVIP

Long run models in economics Professor Bill Mitchell Director, Centre of Full Employment and Equity School of Economics University of Newcastle Australia Objectives To introduce the concept of a long-run (steady-state) model in economics. To demonstrate the hazards in using econometrics to estimate the steady-state. To distinguish types of non-stationarity. To examine impulse responses and stability. To consider cointegration. Long run relations Much of economic theory is comparative static. That means it considers equilibrium or steady-state relationships. These are also called long-run relations. Usually these are cast in terms of relations between levels. What does this mean? What are the problems in estimating these models? Figure 1 Z1 and Z2 Question 1: Describe the pattern you observe and speculate a priori on whether you think there would be a relationship between these two variables and whether it would be a positive or negative relationship. Levels and Differences - Z1 and Z2 Question 3: Interpret results and confirm “eye balling” Question 4: Interpret as a money demand function? Question 6: Assume all right hand side variables take their mean values in perpetuity? Is there a unique steady-state value for Z1*? Mean values: Z1= 9.369454 Z2 = 8.435816 Z4 = -9.904742 We can thus compute Z1* from the regression. Steady-state Means: Z1= 9.369454; Z2 = 8.435816, Z4 = -9.904742. As long as there are no changes in Z2 and Z4 then Z1 will remain stable and only be subject to random shocks (with mean zero). Question 7: The alarm bells Concept of stationarity Classical inference is based on strict assumptions about the residuals. They must be white noise. These assumptions are typically violated when we use non-stationary regressors. Spurious regression problem arises – a relationship appears to exist but in fact it is just an artifact of contemporaneous correlation between the variables. Two types of non-stationarity How were Z1 and Z2 generated? They were sim