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Interpreting Long-run Equilibrium Solutions in Conventional Macro Models: A Comment

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  • Hendry, David F
  • Neale, Adrian J

Abstract

C. M. Kelly (1985) claims that long-run solutions from econometric models may be seriously misleading when expectations variables are erroneou sly replaced by observed outcomes. It is shown that his results deriv e uniquely from an invalid exogeneity assumption. All inferences are therefore potentially invalid, illustrated by a case where the long-r un is correct while the short-run is biased. Using an encompassing fr amework, error-variance rankings and related tests distinguishing exp ectational from conditional models are derived for stationary cases. For nonstationary integrated series, the long-run will be correctly e stimated when the data are cointegrated, whereas the short-run remain s biased. Copyright 1988 by Royal Economic Society.

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  • Hendry, David F & Neale, Adrian J, 1988. "Interpreting Long-run Equilibrium Solutions in Conventional Macro Models: A Comment," Economic Journal, Royal Economic Society, vol. 98(392), pages 808-817, September.
    • Handle: RePEc:ecj:econjl:v:98:y:1988:i:392:p:808-17
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    Cited by:

    1. Pål Boug & Ådne Cappelen & Anders R. Swensen, 2000. "Expectations in Export Price Formation Tests using Cointegrated VAR Models," Discussion Papers 283, Statistics Norway, Research Department.
    2. Neil R. Ericsson, 2021. "Dynamic Econometrics in Action: A Biography of David F. Hendry," International Finance Discussion Papers 1311, Board of Governors of the Federal Reserve System (U.S.).
    3. Bagnai, Alberto & Carlucci, Francesco, 2003. "An aggregate model for the European Union," Economic Modelling, Elsevier, vol. 20(3), pages 623-649, May.
    4. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    5. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    6. Warner, Andrew M, 1994. "Does World Investment Demand Determine U.S. Exports?," American Economic Review, American Economic Association, vol. 84(5), pages 1409-1422, December.
    7. Udo, Eli A. & Obiora, Isitua K., 2006. "Determinants of Foreign Direct Investment and Economic Growth in the West African Monetary Zone: A System Equations Approach," Conference papers 331519, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    8. Pål Boug, 1999. "The Demand for Labour and the Lucas Critique. Evidence from Norwegian Manufacturing," Discussion Papers 256, Statistics Norway, Research Department.
    9. Ghose, Devajyoti, 1995. "Linear aggregation in cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1011-1032.

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