Tuesday, April 19, 2011

Economist's View: Empirical and Historical Validation of Macroeconomic Models

Economist's View looks at the failure of the Bernanke type economic accelerator model to explain much of the deviation in output. However, this is rather the same as the failure of the short period of housing data to show the possibility of a simultaneous fall in house prices across the country.
"That was a mistake, but what is the lesson? One is that we should not necessarily ignore something just because it cannot be found in the data. Much of the empirical work prior to the crisis involved data from the early 1980s to the present (due to an assumption of structural change around that time), sometimes the data goes back to 1959 (when standard series on money end), and occasionally empirical work will use data starting in 1947. So important, infrequent events like the great Depression are rarely even in the data we use to test our models. Things that help to explain this episode may not seem important in limited data sets, but we ignore these possibilities at our own peril."

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