Consistent Region-Subregion Econometric Models: A Comparison of Multiarea Methods

Questions relating to the optimal structure of state-substate multiregional models are addressed by comparing four multiarea models estimated for Arizona and its subcomponent areas. The study arrives at three major findings on structural methodology. First, greater accuracy is achieved at both the state and substate levels when the areas are estimated by a separate single-area free-standing model. Second, the multiarea model structures which maximize accuracy at the state level also maximize sub-state area accuracy. Third, few trade-offs must be made between forecasting accuracy and capability for local impact simulation. Among the multi-area models, those with some "bottom-upness' in model structure are both superior in terms of theoretical correctness and ease of simulation for local impact simulation and most accurate for forecasting.