Macroeconomic Modeling

An empirical approach to constructing macroeconomic models.

Macroeconomic Modeling presents an empirically based approach to the construction of macroeconomic models—the Cowles Commission approach—as a response to the backlash that has taken place since the late 1970s to this methodology. The emphasis in the literature has been on tightly specified theoretical models, which lack realism. In this book, Ray C. Fair develops models to analyze a variety of issues and events in macroeconomics and the US economy, and he explains the econometric techniques needed to estimate those models. Many of the results are either contrary to results from the theoretical models or cannot be examined by the theoretical models because they omit many important features of the economy.

Fair covers a broad range of topics, including inflation and unemployment, the size of wealth effects, the behavior of the Federal Reserve and its effects on the economy, the effects of fiscal policy, Okun’s law, and contractions and expansions. Macroeconomic Modeling will appeal equally to graduate students and researchers as well as macroeconomic policy makers.1 Part I: Introduction
1 Why This Book?
2 Macro Data
3 The Econometrics
4 Part II: The US Model
4 Specification and Estimation of the US Model
5 Constructed Variables
6 Identities
7 Exogenous Variables
8 Solution
9 Part III: Analysis of the US Model
9 Size of Wealth Effects
10 Size of Fed’s Effect on Output, Unemployment, and Inflation
11 Changes in Fed’s Behavior Since 2008
12 Effects of Inflation Shocks
13 Size of Government Spending Multipliers
14 Okun’s Law
15 Explaining Contractions and Expansions
16 Part IV: Models with Rational Expectations–optional.
17 Part V: Multicountry Econometric Models–optional
18 Part VI: Further Material–optional
19 Appendix
20 References“Ray Fair’s pioneering work in macroeconomic modeling has been extraordinarily influential over the past half-century. This volume provides a comprehensive view of Fair’s unique perspective and insights on this topic.”
—Andrew Levin, Professor of Economics, Dartmouth College
 
“Before SVARs and DSGE models existed, there were macroeconometric models in the Cowles Commission tradition. This book presents a masterful version of the latter, continuously updated by the author, to address timely macroeconomic policy questions.”
—Frank Schorfheide, Christopher H. Browne Distinguished Professor of Economics, University of Pennsylvania; coauthor of Bayesian Estimation of DSGE Models
 
“This book gives a very transparent overview of the data, estimation, and evaluation issues involved in developing a large, semi-structural macroeconometric model for the US economy. It is an excellent core tool for economic analysis and forecasting.”
—Frank Smets, Advisor to the Executive Board, European Central Bank
 
“A remarkable book from a remarkable author. Ray Fair’s empiricism is grounded in fact, ruthlessly honest, and never doctrinaire. When you’ve read enough of modern macroeconomics that sacrifices empirical reality to theoretical purity, turn to Macroeconomic Modeling for a breath of fresh air.”
—Alan S. Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs, Princeton University; author of A Monetary and Fiscal History of the United States, 1961–2021Ray C. Fair is Professor of Economics at Yale. His research has primarily been in the areas of macroeconomics and econometrics, although he has also done work in finance, voting behavior, and aging in sports.