American Economic Association

Macroeconometrics in a Global Economy

Author(s): John F. Helliwell
Reviewed work(s):
Source: The American Economic Review, Vol. 83, No. 2, Papers and Proceedings of the
Hundred and Fifth Annual Meeting of the American Economic Association (May, 1993), pp.
294-299
Published by: American Economic Association
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 Macroeconometrics in a Global Economy

By JOHNF. HELLIWELL*

Macroeconometrics is becoming more the years from 1969 through 1983, and 3.3
global in four main ways:much more of the percent,alsowithoutapparenttrend,in 1984
modeling activity and innovation is taking and subsequentyears. Since the JEL data
place outside the United States than was base includes chapters in collective works
true 20 years ago; there is more use of from 1984 on, and books from 1986 on, it is
multicountryor global models; there are natural to suppose that the jump in 1984
increasingattempts to model the effects of maybe related to the change in the types of
globalization on the structure of the na- publication covered. However, separate
tional and international economies; and analysisby publicationtype shows that the
there is increasinguse of comparativedata post-1984increasehas been concentratedin
from many countries to help estimate pa- journal publicationsof the sort consistently
rametersthat are difficultto identifyon the reported by the JEL since 1969, and that
basis of evidence from a single national the percentage of journal articles in the
economy. I shall deal briefly with each of chosen categoriesis slightlyhigherthan that
these four developments. for chapters in collective volumes and sub-
stantiallyhigherthan that for books.
I. WhatHappenedto Macroeconometric To get some idea of the structureunder-
Modeling? lying this aggregatebehavior,I investigated
further with a subsample of publications
From the title of this session it might be clearlyrelated to macroeconometricmodel-
thoughtthat there has been a great slacken- ing: all those articles,books, or chaptersin
ing of interest and activityin the construc- books with "macroeconometric" or "macro-
tion and use of macroeconometricmodels. econometric"in the title or abstract.This
What is the evidence? To get some idea of produced119 items out of the largersample
the volume of this research,or at least of its of about 5,800, and the subsampledisplayed
reflections in the mainstreamacademic lit- almost exactlythe same pattern of increase
erature, I used the data on the Journalof in the 1980's as is evident for the larger
Economic Literature (JEL) CD-ROM to sample. What is strikinglyapparent from
measure the relative frequency of publica- the subsampleis the sharp rise in modeling
tions in the five JEL categories most used research and publication relating to (and
to describe publicationsinvolvingthe con- usually done in) countries outside the
struction and use of macroeconometric United States. The United States was the
models.' Publicationsin these categoriesav- focus of more than 40 percent of the coun-
eraged 2 percent of the total JEL-listed try-specificmodeling papers published be-
publications, without detectable trend, in fore 1984,but of less than 15 percent there-
after. Papersrelatingto Europeancountries
(includingthe United Kingdomand Eastern
*
Europe) rose from less than one-quarterof
Harvard University, 1737 CambridgeSt., Cam- the total before 1983 to more than one-half
bridge,MA 02138,Universityof BritishColumbia,and
NBER. I am gratefulfor the researchsupportof the in subsequent years. Modeling papers re-
Social Sciences and HumanitiesResearch Council of lated to developingcountriesalso grewmore
Canada. rapidlythan average, rising from less than
tOf the five categories,there are four dealingwith 20 percent of the total before 1984 to more
forecastingusingeconometricmodels(1320,1322,1323, than 25 percent thereafter.Within the Eu-
and 1324)and one with "construction,analysisand use
of econometricmodels" (2120). The proceduresand ropean bulge, the fastest growthof publica-
resultsare describedin Helliwell(1992a). tions was in and aboutthe United Kingdom,
294
VOL.83 NO. 2 WHATHAPPENEDTOMACROECONOMETRIC
where the proportionrose from 5 percent
pre-1984 to more than 25 percent of the
global total in the post-1984 period. The
U.K. activitywas clearly related to the size
and nature of grant-funded research in
macroeconometric modeling. There is a
separate competitivegrant-fundedresearch
pool for macroeconometric research (fi-
nanced jointly by the Economic and Social
Research Council, the U.K. Treasury,and
the Bank of England) which has increas-
ingly directed funds toward those projects
that are most active in research leading to
publications.Even if the U.K. surge is re-
moved, the shift in model-relatedresearch
from the United States to other countriesis
still very apparentin the subsampleof pa-
pers and may well be applicable to the
largersample.
Less methodicalreviewof the topics and
methods of the papers suggests that there
has been some broadeningof the range of
modeling techniques and assumptions.
There are now at least three distinct cate-
gories of empirical general-equilibrium
models. These comprisethe longer-standing
but evolvingstreamof dynamicKeynesian/
neoclassical synthesis models flowing from
the pioneering efforts of Jan Tinbergen
(1939) and Lawrence Klein (1950), often
with monetarystructuresinspiredby James
Tobin (1969). A second class of models
often referred to as CGE (computable
general-equilibrium) models,were originally
of static interindustryform with calibrated
parameters (Richard Harris, 1984; John
Whalley, 1985), but more recently acquired
dynamic structure and monetary features
(Warwick McKibbin and Jeffrey Sachs,
1991),includingthe possibilityof short-term
variationsin capacityutilization.A third set
of real-business-cyclemodels (Finn Kydland
and Edward Prescott, 1982) were initially
based on the assumptionsof optimizingrep-
resentativeagents operatingin a frictionless
and fully informed environment without
monetaryinfluencesbut are increasinglyin-
cludingfrictionsand asymmetriesthat help
to account for cyclical fluctuations.As the
latter two classes of models become more
data-dependentin their assumptionsabout
behavior and their estimation of parame-
MODELS? 295
ters, and as the models of the first group
attach more importanceto their long-term
equilibriumproperties in order to permit
more explicit treatmentof expectations(as
describedby John Taylor,1993),the distinc-
tions between them are likely to become
more blurred. However, there is still an
unfortunate tendency for choices about
model structureand specificationto depend
more on theoretical predilections and the
saltiness of nearby water than on demon-
stratedabilityto explainmacroeconomicex-
perience. There is as yet too little by way of
efforts to define and evaluate testable dif-
ferences amongmodel structuresthat claim
to represent different theoretical ap-
proaches.
In addition to the above three classes of
structural approaches to macroeconomic
modeling, there have also been many pa-
pers (e.g., Christopher Sims, 1980) using
vector autoregressive(VAR) approachesto
explaining and forecasting macroeconomic
variables.Whether these are best regarded
as macroeconomicmodels or as forecasting
alternativesagainstwhich models are to be
compared and tested may be a matter of
semantic taste rather than substance, but
VAR and other time-series approachesto
macroeconomicsare an importantpart of
the post-1984 interest in macroeconomic
modelingand forecasting.
Modeling
II. Multicountry
Another area of naturallygrowinginter-
est has been the use of multicountrymodels
to study international interdependence
(Ralph Bryant et al., 1988), the costs and
benefits of internationalpolicy coordination
(Bryantet al., 1989),and the choice of opti-
mal policy rules in a stochasticenvironment
(Bryantet al., 1993).This work,often based
in national and international agencies, as
well as in universities, has become more
widely known and useful through the ex-
tended series of model evaluations and
comparisonsbased at the BrookingsInstitu-
tion. As reported in the volumes edited by
Bryantet al., the models reveal a varietyof
estimates of the extent and structure of
internationalmacroeconomiclinkages.This
296 AEAPAPERSAND PROCEEDINGS
variety led Jeffrey Frankel and Katharine
Rockett (1988) to emphasizethe difficulties
posed for successfulinternationalcoordina-
tion of macroeconomicpolicies if calcula-
tions are based on one model while the
world is more accurately depicted by an-
other. Subsequent analysis by Gerald
Holtham and Andrew Hughes Hallett
(1992), and furthercalculations,by Frankel
et al. (1992) show that model variety can
provide a good check on the robustnessof
policy choices, since policies that appear to
be advantageous on the basis of several
differentmodels are shownto be better able
to survive mistakes about the underlying
structureof the economy.The same variety
of policy responses has been shown by the
properties of U.S. national models, as re-
ported in the recent model comparisonvol-
ume edited by Klein (1991), but there has
been little by way of attempts to utilize
national model diversity to inform policy
choices. As noted by the comments of
Robert Shiller in the Klein (1991) volume,
and by Ray Fair in the Bryantet al. (1993)
volume, the methodical use of different
models to represent comparablyprobable
views of the world requires first that the
models pass similartests of goodness of fit,
dynamic structure,and theoretical congru-
ence. If this is not done, then the range of
outcomes is likely to be needlesslywidened,
and the informationset excessivelylimited,
by includingimplausiblemodels
III. ModelingGrowthin a Globalizing
Environment
Most macroeconometricmodels, whether
national or multicountry,are still relatively
incomplete and often unconvincingin the
determinationof the level and rate of growth
of productivecapacity.Especiallyas models
start to embody constraintsforcing longer-
run output levels towardssome sort of sup-
ply-determinedvalues, it is critical to un-
ravel the domestic and internationalforces
affecting the size and growth of potential
output. Studies of comparativegrowth are
accumulatingevidence that rates of produc-
tivity growth are not constant across coun-
tries or over time, even after adjustingfor
MAY1993
cyclicaldisturbances,and that they continue
to providethe largest shares of increasesin
per capita incomes. Furthermore,evidence
and theoretical developments (e.g., Gene
Grossmanand ElhananHelpman,1991),are
starting to emphasize the international
transferof ideas as a majorsource of what-
ever international convergence is taking
place in growth rates and income levels.
This suggests that the production-function
residuals first exposed by Robert Solow
(1957) so frequentlyassumed to be exoge-
nous trends, taken to be the result of auto-
correlatedtechnologyshocks, or treated as
uncomfortably cyclical exogenous distur-
bances,will become the focus for the empir-
ical and theoretical attention that their
changingtrends and systematiccyclicalvari-
ance have so long merited.
There are two great advantageslikely to
accruefrom more systematicanalysisof the
properties of Solow residuals. On the one
hand there will be increasingattentionpaid
to the determination of the longer-term
growthrates of technicalprogress,and anal-
ysis of the links between technology,invest-
ment and trade. On the other hand, and
most relevantto the short-termstructureof
macromodels, there will be renewed atten-
tion to the cyclicalvarianceof Solow residu-
als. This will show beyond all doubt the
cyclicityof utilization rates of both capital
and labor. Such analysis will prompt the
reestablishmentof models of the determi-
nation of wages, prices, employment,hours,
and inventoriesthat reflect the quasi-fixity
of all factor inputs. These models also will
point to the potentialrole for inventoriesto
mediate between the short-termoutput de-
cision (reflectingthe costliness of changing
currentfactor inputs) and the variabilityof
final sales (reflectingthe combinationof the
short-termfixityof prices and unanticipated
changes in final demand).
Many existing macroeconometricmodels
embody some elements of the necessary
synthesis. This is because their demand
equations for capital and labor, combined
with stickywages and prices and their use of
aggregate demand to determine current
output, force cyclical departuresfrom nor-
mal factor-utilizationrates for employed
VOL.83 NO. 2
WHATHAPPENEDTOMACROECONOMETRIC
factors. This feature may not be explicit or
appropriatelybounded, since the factor de-
mands and price equations are not always
consistentlyderivedfrom a coherent under-
lyingproductionstructure.Most of the early
CGE models, by contrast, have an explicit
and consistentunderlyingproductionstruc-
ture but either ignored dynamic adjust-
ments altogetheror else assumed some ar-
bitraryadjustmentpath with resourcesfully
employed during the transition.Real-busi-
ness-cycle models have explicit production
structuresand expose the fact that the Solow
residuals contain most of the variance of
aggregate GDP, but have tended to treat
the Solow residualsas determinedsolely by
autocorrelated technology shocks (Robert
King et al., 1988). As the links between
these alternativemodeling approachesbe-
come clearer, there is likely to be more
explicit recognition of the importance of
demand-side quantity shocks as determi-
nants of Solow residuals, more explicit
treatment of production structuresin syn-
thesis models, and more attention paid to
the sourcesof the longer-termdeterminants
of technology growth in all classes of
macroeconometricmodels.
International linkages are increasing in
strength and pervasiveness,yet most theo-
ries and applied models still tend to repre-
sent growing trade shares (which doubled
between 1960 and 1985, on average,for all
industrial countries) as being the conse-
quence of some combinationof high income
elasticities of demand for imported goods
combinedwith trendsof uncertainduration.
It will not be easy to explain either the
determinantsor the full consequences of
increasingopenness, but the importanceof
the resultsis great,especiallygiventhe likely
links between openness and the rates of
technical progress (studied in Helliwell
[1992b])that are central to the determina-
tion of longer-termgrowth.
Openness to capital movementsis often
assumedby applyingsomethingakin to un-
coveredinterest parityas a means of deter-
mining spot exchange rates. Yet the large
and persistent departuresfrom purchasing-
power parity, and the failure of forward
rates to be predictorsof future spot rates
MODELS?
297
suggest that the arbitrageconditionis more
a means of - determining market forward
rates than of tying down the spot exchange
rate. The determinantsof longer-terminter-
national capital movements and the split
between directand portfolioinvestmentalso
remainpoorlyunderstood.
Population movements are more easily
dealt with in a modeling context, chiefly
because migration controls remain among
the more generallyused of the shrinkingset
of economic policies available to the
nation-state. As for internationallinkages
beyond the movements of goods, services,
and population, they remain both poorly
measuredand vaguelyconceived.It is easier
to speak in general of the dramaticchanges
in the potential and relative costs of global
communicationsand transportationthan it
is to assess their impacton the evolutionof
national economies and of the linkages
among them. There is also much to be
learned about the influence of linguistic,
legal, institutional,educational,cultural,ge-
ographic,and political cleavagesin limiting
the internationalmigrationand applications
of technologiesboth old and new.
IV. ComparativeMacroeconometrics
The increasingavailabilityof longer sam-
ples of comparablemacroeconomicdata for
more countriesoffers the possibilityto illu-
minatebits of macroeconomicstructurethat
are difficultor impossibleto identify using
time-seriesevidence for a single country.It
also places a useful check on the otherwise
natural but opposing tendencies either to
generalizeon the basis of a single country's
experience or to explain common features
of behavior in terms of policies or events
that are particular to one's own country.
For example, it has been possible to show
that in countrieswith more stable employ-
ment, whether through custom or policy-
induced attachments between firms and
workers,firms tend to have greater cyclical
variations in productivity, and to make
greater use of inventories as a buffer be-
tween final demand and production. In-
creasing use of international panels of
time-series and cross-section data should
298 AEA4PAPERSAND PROCEEDINGS
permitnot only more precisionin the deter-
minationof the size and significanceof in-
ternational differences in macroeconomic
behavior,but also, by increasingthe number
of observationsand the range of interna-
tional experience,tighter estimates of com-
mon parameters.
To summarize,I have presentedevidence
that there has been a global increase in
both the pace and breadth of macroecono-
metric modeling activity,with the bulk of
the increased activity taking place outside
the United States. This global increase in
researchinterest,as representedby publica-
tions in academicjournals,has involvedsev- Frankel,Jeffreyand Rockett,Katharine,"Inter-
eral strands of modeling activity,including
multicountryas well as nationalmodels, and
has started to use data from a number of
countriesto help identifyboth the evolution
of national economies and the increasing
number and diversity of linkages among
them. In the process, the historic linkage
between macroeconomicmodeling and the
nation-state,initiallydue to the availability
of national accounts and the emphasis on
nationalpolicyinstruments,is being broken. Grossman,Gene and Helpman,Elhanan, Inno-
Increasingly, macroeconomic modeling is
being defined in international and global
terms. These trends are likely to continue, Harris, Richard G., "Applied General Equi-
since the systematicstudy of the macroeco-
nomic data and institutionsof many coun-
tries is likelyto lead to better understanding
of nationaleconomies,of internationallink-
ages, and of global changes. At the same Helliwell, John F., (1992a) "Macroecono-
time, increasinginterdependenceis making
international repercussions of domestic
policies (and the domestic effects of inter-
national events) so importantthat macroe-
conometricmodeling will have to continue
on its global course if it is to remain rele-
vant to policy choices.
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