A macroeconometric model of a developing economy

A simpler macroeconomic model of a developing economy is developed under the IS–LM and Mundell–Fleming model framework. The model is estimated and evaluated using the quarterly time-series data of Papua New Guinea, a small open developing economy. The macroeconometric version of the model, an over-identified simultaneous equation model with error correction specifications, is estimated by the 2SLS-CORC method. The specification of the model is appropriate and its predictive accuracy and structural stability are of acceptable standards. The model estimates are found useful to study the behaviour of the macroeconomic variables and to make forecasting in a developing economy. This model provides the basic structure to study macroeconomic behaviour and to make forecasts in developing economies. The model is capable of efficiently tracking the historical value of endogenous variables. The model must be appropriate for a small open developing economy with necessary modification for lag structure, structural break etc. It can be easily managed with minimum data input and resources. The model will be of interest to developing countries in the Asia-Pacific and other regions to conduct various policy analyses.