Table Of ContentHANDBOOK OF RESEARCH METHODS AND
APPLICATIONS IN EMPIRICAL MACROECONOMICS
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HANDBOOKS OF RESEARCH METHODS AND APPLICATIONS
Series Editor: Mark Casson, University of Reading, UK
The objective of this series is to provide definitive overviews of research methods in
important fields of social science, including economics, business, finance and policy
studies. The aim is to produce prestigious high quality works of lasting significance.
Each Handbook consists of original contributions by leading authorities, selected by an
editor who is a recognized leader in the field. The emphasis is on the practical applica-
tion of research methods to both quantitative and qualitative evidence. The Handbooks
will assist practising researchers in generating robust research findings that policy-
makers can use with confidence.
While the Handbooks will engage with general issues of research methodology, their
primary focus will be on the practical issues concerned with identifying and using suit-
able sources of data or evidence, and interpreting source material using best-practice
techniques. They will review the main theories that have been used in applied research,
or could be used for such research. While reference may be made to conceptual issues
and to abstract theories in the course of such reviews, the emphasis will be firmly on real-
world applications.
Titles in the series include:
Handbook of Research Methods and Applications in Urban Economies
Edited by Peter Karl Kresl and Jaime Sobrino
Handbook of Research Methods and Applications in Empirical Finance
Edited by Adrian R. Bell, Chris Brooks and Marcel Prokopczuk
Handbook of Research Methods and Applications in Empirical Macroeconomics
Edited by Nigar Hashimzade and Michael A. Thornton
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Handbook of Research Methods
and Applications in Empirical
Macroeconomics
Edited by
Nigar Hashimzade
Durham University, UK
Michael A. Thornton
University of York, UK
HANDBOOKS OF RESEARCH METHODS AND APPLICATIONS
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
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© Nigar Hashimzade and Michael A. Thornton 2013
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or
otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
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Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
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Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2012952654
This book is available electronically in the ElgarOnline.com
Economics Subject Collection, E-ISBN 978 0 85793 102 3
ISBN 978 0 85793 101 6 (cased)
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Printed and bound in Great Britain by T.J. International Ltd, Padstow
3
0
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Contents
List of contributors vii
1 Introduction 1
Nigar Hashimzade and Michael A. Thornton
2 A review of econometric concepts and methods for empirical
macroeconomics 4
Kerry Patterson and Michael A. Thornton
PART I PROPERTIES OF MACROECONOMIC DATA
3 Trends, cycles and structural breaks 45
Terence C. Mills
4 Unit roots, non- linearities and structural breaks 61
Niels Haldrup, Robinson Kruse, Timo Teräsvirta and Rasmus T. Varneskov
5 Filtering macroeconomic data 95
D.S.G. Pollock
PART II MODELS FOR MACROECONOMIC DATA ANALYSIS
6 Vector autoregressive models 139
Helmut Lütkepohl
7 Cointegration and error correction 165
James Davidson
8 Estimation and inference in threshold type regime switching models 189
Jesús Gonzalo and Jean- Yves Pitarakis
9 Testing structural stability in macroeconometric models 206
Otilia Boldea and Alastair R. Hall
10 Dynamic panel data models 229
Badi H. Baltagi
11 Factor models 249
Jörg Breitung and In Choi
12 Conditional heteroskedasticity in macroeconomics data: UK inflation,
output growth and their uncertainties 266
Menelaos Karanasos and Ning Zeng
13 Temporal aggregation in macroeconomics 289
Michael A. Thornton and Marcus J. Chambers
v
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vi Contents
PART III ESTIMATION AND EVALUATION FRAMEWORKS IN
MACROECONOMICS
14 Generalized Method of Moments 313
Alastair R. Hall
15 Maximum likelihood estimation of time series models: the Kalman filter
and beyond 334
Tommaso Proietti and Alessandra Luati
16 Bayesian methods 363
Luc Bauwens and Dimitris Korobilis
17 Forecasting in macroeconomics 381
Raffaella Giacomini and Barbara Rossi
PART IV APPLICATIONS I: DYNAMIC STOCHASTIC GENERAL
EQUILIBRIUM MODELS
18 The science and art of DSGE modelling: I – construction and Bayesian
estimation 411
Cristiano Cantore, Vasco J. Gabriel, Paul Levine, Joseph Pearlman and
Bo Yang
19 The science and art of DSGE modelling: II – model comparisons, model
validation, policy analysis and general discussion 441
Cristiano Cantore, Vasco J. Gabriel, Paul Levine, Joseph Pearlman and
Bo Yang
20 Generalized Method of Moments estimation of DSGE models 464
Francisco J. Ruge- Murcia
21 Bayesian estimation of DSGE models 486
Pablo A. Guerrón- Quintana and James M. Nason
PART V APPLICATIONS II: VECTOR AUTOREGRESSIVE
MODELS
22 Structural vector autoregressions 515
Lutz Kilian
23 Vector autoregressive models for macroeconomic policy analysis 555
Soyoung Kim
PART VI APPLICATIONS III: CALIBRATION AND SIMULATIONS
24 Calibration and simulation of DSGE models 575
Paul Gomme and Damba Lkhagvasuren
25 Simulation and estimation of macroeconomic models in Dynare 593
João Madeira
Index 609
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Contributors
Badi H. Baltagi is Distinguished Professor of Economics and Senior Research Associate
at the Center for Policy Research, Syracuse University. He received his PhD in
Economics at the University of Pennsylvania in 1979. He is also part-t ime Chair in
Economics, University of Leicester, and was a visiting Professor at the University of
Arizona and the University of California, San Diego. He is the author of several books
including Econometric Analysis of Panel Data (Wiley) and Econometrics (Springer), and
an editor of A Companion to Theoretical Econometrics (Blackwell), Recent Developments
in the Econometrics of Panel Data, Volumes I and II (Edward Elgar), and Nonstationary
Panels, Panel Cointegration, and Dynamic Panels (Elsevier). He is also an author or
a co- author of over 140 publications, all in leading economics and statistics journals.
Professor Baltagi is the editor of Econo mics Letters, the editor of Empirical Economics,
and an associate editor of the Journal of Econometrics and Econometric Reviews. He is
the replication editor of the Journal of Applied Econometrics and the series editor for the
Contributions to Economic Analysis. He is a fellow of the Journal of Econometrics and a
fellow of Advances in Econometrics. Badi Baltagi is a recipient of the Multa and Plura
Scripsit Awards from Econometric Theory journal and a recipient of the Distinguished
Authors Award from the Journal of Applied Econometrics.
Luc Bauwens is Professor of Economics at the Université catholique de Louvain,
where he is the President of the Center for Operations Research and Econometrics. His
research focuses on financial and Bayesian econometrics. He received the Leonard J.
Savage Thesis Award in 1984. He belongs to the editorial board of the Journal of Applied
Econometrics and is associate editor of the Journal of Financial Econometrics.
Otilia Boldea is Assistant Professor in Econometrics at Tilburg University and research
fellow at CentER. Her research focuses on time series econometrics in the pres-
ence of structural change and endogeneity, as well as on empirical monetary and
macroeconomics.
Jörg Breitung is Professor of Econometrics at the University of Bonn, Germany and
advisor of the German Central Bank (Deutsche Bundesbank). His research focuses on
time series and panel data analysis. From 1994 to 2002 he was Assistant Professor at the
Humboldt University of Berlin and Professor of Statistics at the University of Göttingen
(Germany).
Cristiano Cantore is a Lecturer in the School of Economics and member of the Centre
for International Macroeconomic Studies (CIMS) at the University of Surrey. He earned
a PhD in Economics from the University of Kent, where his research focused on finan-
cial frictions and capital–labour substitution in dynamic stochastic general equilibrium
(DSGE) models. Cristiano has also worked at the OECD and at the ECB as a trainee and
at the Bank of Spain as a visiting research fellow. His current research interests include
macroeconomic theory, business cycles, monetary economics, and production theory.
vii
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viii Contributors
Marcus J. Chambers is Professor of Economics at the University of Essex. His research
is mainly in the area of time series econometrics. Since 2004 he has been an Associate
Editor of the Journal of Econometrics.
In Choi is Professor at Sogang University in Seoul, Korea. His research focus has been
on time series and panel data analysis, and he has published numerous papers in leading
journals in econometrics. He is a Fellow of the Journal of Econometrics and a recipient of
the Plura Scripsit Award from Econometric Theory, one of the leading journals in econo-
metrics. He is currently an Associate Editor of the Journal of Business and Economics
Statistics.
James Davidson is Professor of Econometrics at the University of Exeter, and has previ-
ously held positions at Cardiff University and the London School of Economics. He is
the author of two well- known econometrics texts, Stochastic Limit Theory (1994) and
Econometric Theory (2000). His published research has focused on problems of estima-
tion and inference in non- stationary and long memory processes.
Vasco J. Gabriel is a Senior Lecturer in Economics at the University of Surrey. He is
a founding member of the Centre for International Macroeconomic Studies (CIMS)
at Surrey and a Visiting Fellow of the Economic Policies Research Unit (NIPE)
at the University of Minho. His research focuses on econometrics and applied
macroeconomics.
Raffaella Giacomini is Associate Professor of Economics at University College London,
British Academy Mid- Career Fellow and research fellow at CEPR and at the Center for
Microdata Methods and Practice (Cemmap). Her research focuses on time series econo-
metrics, forecasting, and applied macroeconomics. Previous faculty positions include
UCLA and Boston College.
Paul Gomme is Professor of Economics at Concordia University and a Research Fellow at
Centre Interuniversitaire de Recherche en Economie Quantitative (CIREQ) in Montreal,
Canada. His research focuses on macroeconomics, business cycle theory, and the deter-
minants of unemployment. He has previously worked at Simon Fraser University, the
Federal Reserve Bank of Cleveland, and the University of Iowa.
Jesús Gonzalo is Professor of Econometrics at University Carlos III of Madrid. His
research focuses on time series econometrics: persistence and non- linearities. Prior to his
current position, he was on the faculty of Boston University.
Pablo A. Guerrón- Quintana is an Economic Adviser and Economist in the Research
Department of the Federal Reserve Bank of Philadelphia. His research interests cover
time series and macroeconomics with an emphasis on monetary policy and interna-
tional finance. Prior to his current post, he was an Assistant Professor of Economics
at North Carolina State University. He has served as a consultant for the International
Monetary Fund, the Inter- American Development Bank, and the Corporación Andina
de Fomento.
Niels Haldrup is Professor of Economics, Aarhus University, Denmark, and direc-
tor for CREATES, a centre of excellence in time series econometrics funded by the
Danish National Research Foundation. His research interests are broadly in time series
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Contributors ix
econometrics with particular focus on non- stationary time series analysis, long memory,
and the modelling of persistence in economic and financial time series.
Alastair R. Hall is Professor of Econometrics at the University of Manchester. He is a
member of the Advisory Board for the Info-m etrics Institute at American University and
also an associate editor of Econometric Reviews, Journal of Financial Econometrics, and
Journal of Econometric Methods; he has previously served as co- editor of the Journal of
Business and Economic Statistics. He is the author of Generalized Method of Moments
published by Oxford University Press in 2005. His current research focuses on statistical
inference techniques for econometric models estimated from the information in moment
conditions.
Nigar Hashimzade is Professor of Economics at Durham University. She undertakes
research in economic theory and econometric theory. Prior to her current position she
worked at the University of Exeter and the University of Reading. She holds a PhD
in Economics from Cornell University. Her previous research career was in theoretical
physics.
Menelaos Karanasos is Professor of Financial Economics at Brunel University, London.
His research focuses on empirical finance and applied macroeconomics. Prior to his
current position, he was on the faculty of the University of York.
Lutz Kilian is Professor of Economics at the University of Michigan and research fellow
at CEPR. His research focuses on time series econometrics, empirical macroeconomics,
and energy economics. He has also worked for the research department of the Inter-
American Development Bank in Washington, DC, and has served as a research adviser
to the European Central Bank in Frankfurt.a.M.
Soyoung Kim is Professor of Economics at Seoul National University. He received
the Arnould O. Beckman Research Award, the Tae Sung Kim Research Award, the
Chung Ram Research Award and the NEAR Research Award. Prior to his current
position, he was on the faculty of the University of Illinois at Urbana- Champaign and
Korea University. He was also involved with various institutions like IMF, ADB, ADB
Institute, Bank of Spain, and HKIMR, Bank of Korea, KIEP, KIF, AIRI, Ministry of
Strategy and Finance in Korea under various designations.
Dimitris Korobilis is Lecturer in Economics at the University of Glasgow, research fellow
of the RCEA, and visiting researcher at the Deutsche Bundesbank. His research focuses
on Bayesian time series analysis in empirical macroeconomics. His work has been pub-
lished in the International Economic Review and the Journal of Applied Econometrics.
Robinson Kruse is Assistant Professor of Financial Statistics at the Leibniz University
Hannover in Germany, and an international research fellow at CREATES, Aarhus
University, Denmark. His research areas comprise time series econometrics in general,
and inference in non- linear and fractionally integrated models in particular. He gradu-
ated from the University of Bonn, Germany, obtained his PhD from Leibniz University
Hannover, and was a post- doctoral researcher at CREATES.
Paul Levine received a first- class BSc and a PhD, both in Mathematics, from the
University of Manchester and an MSc in economics (distinction) at Queen Mary
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x Contributors
University of London. In 1984 he became a senior research officer at the Centre for
Economic Forecasting, London Business School, and was appointed Professor of
Economics at the University of Leicester in 1989. In 1994 he moved to the University of
Surrey where he now leads the Centre for International Macroeconomic Studies (CIMS).
His main research activity is in constructing empirically- based DSGE models for the
purpose of macroeconomic policy analysis for which he has acted as a consultant and/or
visiting researcher at the IMF and the ECB.
Damba Lkhagvasuren is Assistant Professor at Concordia University, Montreal,
Canada and Research Fellow at Centre Interuniversitaire de Recherche en Economie
Quantitative (CIREQ). His research areas include macroeconomics, labour market
dynamics and computational methods. Prior to his current position, he worked at the
Kellogg School of Management of Northwestern University and Reinsurance Bureau of
the Mongolian Ministry of Finance.
Alessandra Luati is Associate Professor of Statistics at the University of Bologna, Italy.
Her research focuses on time series econometrics, likelihood based methods and spectral
analysis. She completed a doctoral degree in Statistics at the University of Bologna and
the University of Aarhus.
Helmut Lütkepohl is Bundesbank- Professor of Methods of Empirical Economics at
the Free University Berlin and Dean of the Graduate Center of the DIW Berlin. His
research interests are in the area of time series econometrics. He is an Associate Editor
of Econometric Theory, Macroeconomic Dynamics, Empirical Economics, and other
journals. He has published extensively in leading academic journals, and he is author,
co- author and editor of a number of books in econometrics and time series analysis.
Prior to his current position he was on the faculty of the European University Institute
in Florence, at the Humboldt University in Berlin, and at the Christian- Albrechts-
University Kiel.
João Madeira is a Lecturer in Economics at the University of Exeter. He obtained his
PhD in Economics from Boston University in January 2009 under the supervision of
François Gourio, Simon Gilchrist and Robert King. His research focuses on business
cycle fluctuations and labour market rigidities.
Terence C. Mills is Professor of Applied Statistics and Econometrics at Loughborough
University, having previously held professorial appointments at City University Business
School and Hull University. His research focuses primarily on time series analysis and
econometrics; he is the co- editor of the Palgrave Handbooks of Econometrics and has
recently published The Foundations of Time Series Analysis and A Very British Affair:
Six Britons and the Development of Time Series Analysis (Macmillan Palgrave).
James M. Nason is a Vice President and Economist in the Research Department at the
Federal Reserve Bank of Philadelphia and a research associate at CAMA. His research
covers the areas of macroeconomics, international finance, open economy macro-
economics, and time series econometrics.
Kerry Patterson is Professor of Econometrics at the University of Reading. His research
interests include the econometrics of non-s tationary time series and the development
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