Macroeconometric Modelling with a Global Perspective

Abstract

This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann and Weiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables to their foreign counterparts and then consistently combined to form a Global VAR (GVAR). It is shown that VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where foreign variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated.