AGRODEP Technical Note 11 March 2015 Macro Econometric Modelling: A Practical Approach under EViews, with a Focus on Africa Jean Louis Brillet AGRODEP Technical Notes are designed to document state-of-the-art tools and methods. They are circulated in order to help AGRODEP members address technical issues in their use of models and data. The Technical Notes have been reviewed but have not been subject to a formal external peer review via IFPRI’s Publications Review Committee; any opinions expressed are those of the author(s) and do not necessarily reflect the opinions of AGRODEP or of IFPRI. 2 Table of Contents 1. Introduction ........................................................................................................................... 6 2. A short history of macroeconometric modelling ................................................................ 6 2.1 The First Modelling Efforts: Tinbergen ........................................................................... 6 2.2 Developing the First Operational Models: The Cowles Commission (Later Cowles Foundation) ................................................................................................................................. 6 2.3 The Klein Models ............................................................................................................. 7 The Klein-Goldberger Model ........................................................................................... 7 The Brookings Model ...................................................................................................... 9 The Wharton Model ........................................................................................................ 9 Other Models .................................................................................................................. 9 2.4 The Fall from Favor ....................................................................................................... 10 The Oil Shock ................................................................................................................. 10 The Lucas Critique and DSGEs ....................................................................................... 10 The Sims Critique and VAR Models ............................................................................... 11 2.5 Model Characteristics ......................................................................................................... 12 2.5.1 Comparing the Quality - Calibration ............................................................................. 12 2.5.2 The Problem is the Formula .......................................................................................... 12 2.5.3 SEMs also Use Optimization ......................................................................................... 13 2.5.4 Rational Expectations? .................................................................................................. 13 2.5.5 Comparing Structural Models and VARs ....................................................................... 14 2.5.6 Quasi Accounting Models ............................................................................................. 15 2.5.7 Conclusion ..................................................................................................................... 15 3. Application of Modeling: South Africa ............................................................................. 18 3.1 Building a Model ............................................................................................................ 18 3.1.1 Preparing the Model - First Steps ................................................................................. 18 3.1.2 Estimation ..................................................................................................................... 19 3.1.3 Solving and Testing over the Past ................................................................................. 19 3.1.4 Solving and Testing over the Future ............................................................................. 19 3.1.5 Using Model for Forecasts and Policy Studies .............................................................. 19 3.1.6 How to organize the development of the model ......................................................... 20 3.2 First Example: South Africa ........................................................................................... 23 3.2.1 The Economic Formulations .......................................................................................... 24 3.2.2 Defining the Model Equations ...................................................................................... 41 3.3 The Second Task: Obtaining the Data ........................................................................... 49 3 3.3.1 The Data Needed by the Model .................................................................................... 49 3.3.2 The South African Case ................................................................................................. 53 3.4 The Third Task: Estimating the Equations ..................................................................... 56 3.4.1 Stationarity and the Dickey-Fuller Test ......................................................................... 56 3.4.2 The Production Block .................................................................................................... 62 3.4.3 Prices ............................................................................................................................. 83 3.4.4 Household consumption ............................................................................................... 90 3.4.5 Exports .......................................................................................................................... 92 3.4.6 Conclusion ..................................................................................................................... 95 3.5 The Fourth Task: Simulating the Model ........................................................................ 95 3.5.1 A First Test: Checking the Residuals In The Identities ................................................... 96 3.5.2 Simulating the Model over the Past ............................................................................. 97 3.5.3 Testing the Model over the Future ............................................................................... 99 3.5.4 The Results .................................................................................................................. 101 3.5.5 Stochastic Simulations ................................................................................................ 129 3.6 Rational Expectations .................................................................................................. 137 3.6.1 The Framework ........................................................................................................... 137 3.6.2 Consequences for Model Simulations ........................................................................ 137 3.6.3 Our Example ................................................................................................................ 137 3.6.4 The Tests ..................................................................................................................... 138 4 Another Country: Sénégal ................................................................................................ 144 4.1 Reading the Data: Sen_Read.Prg ................................................................................ 144 4.2 Generating the Model Series: Sen_Genr.Prg .............................................................. 144 4.3 Building the Model Framework and Behaviors: Sen_Model.Prg ................................ 144 4.3.1 Capacity ....................................................................................................................... 144 4.3.2 Productive Investment ................................................................................................ 146 4.3.3 Labor Productivity Trend............................................................................................. 147 4.3.4 Employment ................................................................................................................ 148 4.3.5 Unemployment ........................................................................................................... 149 4.3.6 Wage Rate ................................................................................................................... 151 4.3.7 Imports Deflator .......................................................................................................... 152 4.3.8 Exports Deflator .......................................................................................................... 153 4.3.9 Household Consumption ............................................................................................ 155 4.3.10 Imports At Constant Prices ......................................................................................... 156 4.3.11 Exports At Constant Prices .......................................................................................... 157 4 4.4 A Forecast .................................................................................................................... 158 4.5 The Shocks ...................................................................................................................