|This chapter discusses practical things you should know when working with the MC model. It relies on Chapter 2 and Appendices A and B in Estimating How the Macroeconomy Works. If you are planning to work with the MC model, it may be helpful to have a hardcopy of this book available for ease of reference. In what follows all references to chapters, appendices, and tables are to those in this book. The MC model that is online is the exact model in the book. The non US part of the MC model is called the "ROW" model.|
|The notation for the variables in the ROW model is presented in Tables B.1 and B.2 in Appendix B. Two letters denote the country (CA for Canada, JA for Japan, etc.), and the abbreviations are given in Table B.1. Up to five letters denote the variable (C for consumption, I for investment, etc.), and the names are given in Table B.2 in alphabetical order. The complete name of a variable for a country consists of the country abbreviation plus the variable name, such as CAC for Canadian consumption, JAI for Japanese investment, etc. The two letters EU denote the European countries in the model that are part of the EMU. These are: AU, FR, GE, IT, NE, FI, BE, GR, IR, PO, SP. (Luxembourg, which is also part of the EMU, is not in the model.) (GR joined January 1, 2001.)|
|1.2 Solution Options|
|There are five choices you can make regarding the solution of the MC
The size of the MC model is discussed in Section 2.1 in Chapter 2, and the way in which the model is solved is discussed in Section B.6 in Appendix B. If you ask to solve the MC model and the model does not solve, you will get an error message to that effect. When this happens your dataset will not have been changed. You will need to make less extreme changes and try again. The model has not been solved when there is an abnormal abort, which usually means that the program has tried to take the log of a negative number.
Because the MC model (unlike the US model) is not iterated until convergence (because LIMITA and LIMITB above are fixed), it may be the case that the program finishes normally (no abnormal abort) but that the model did not really solve. If you are concerned about this, there is one check that you can perform, which is to increase LIMITA and LIMITB. If the model has correctly solved, it should be the case the increasing LIMITA and LIMITB has a very small effect on the solution values. You can thus increase LIMITA and LIMITB and see if the output values change much. If they do not, then you can have considerable confidence that the model has been solved correctly. The maximum values of LIMITA and LIMITB that you are allowed are 15 and 15, respectively.
|1.3 Changing Stochastic Equations|
|There are four changes you can make to any of the 362 stochastic
|1.4 Creating Base Datasets|
|If you ask the program to solve the MC model for any period
beginning 2003 or
later and you make no changes to the coefficients and exogenous
solution values for the endogenous variables will simply be the values
that are already in
MCBASE. If, on the other hand, you ask the program to solve the model
for a period
beginning earlier than 2003, where at least some actual data exist, the
will not be the same as the values in MCBASE because the model does not
(the solution values of the endogenous variables are not in general equal
to the actual
values). It is thus very important to realize that the only time the
solution values will
be the same as the values in MCBASE when you make no changes to the
and coefficients is when you are solving beginning 2003 or later.
If you want to work with the MC model for a period for which actual data exist, you will probably want to use the historical errors (i.e., set the errors equal to their estimated values and take them to be exogenous). If for any period you use the historical errors and solve the model with no changes in the exogenous variables and coefficients, you will get a perfect tracking solution. This is usually a good base to perform various experiments.
|1.5 Treatment of the EMU Regime|
As noted above, there are 10 countries in the model that are part of the
EMU beginning January 1, 1999: AU, FR, GE, IT, NE, FI, BE, IR, PO, and SP.
GR joined January 1, 2001. EU denotes these countries.
Prior to 1999 each of these countries
has an estimated interest rate reaction function (equation 7), and each
country except FI, SP, and GR
has an estimated long term interest rate equation
(equation 8). In addition, GE has an estimated exchange rate equation
where the exchange rate explained is the DM/$ rate, and each of the other
countries has an estimated exchange rate equation where the
exchange rate explained is the local currency/DM rate (equation 9).
For the EMU regime, which begins in 1999:1 for 10 countries and 2001:1 for GR, equations 7, 8, and 9 for the individual EMU countries are dropped from the model. EU equations 7, 8, and 9 are added beginning in 1999:1.
The software allows you to change the EU interest rate and exchange rate equations. The "country" that you will click is EU. Remember that these equations are only relevant from 1999:1 on. Also remember that the equations that have been dropped for the individual EMU countries from 1999:1 on are not part of the model from 1999:1 on. They only matter prior to 1999:1. For GR the switch date is 2001:1.
There is one special features of the online software regarding the EMU regime, which pertains to equations 7 and 8 explaining RS and RB. As mentioned above, for the EMU countries these equations end in 1998:4 (2000:4 for GR). If you are working with a period prior to 1999:1 and you drop equation 7, you can then change the RS values using the "Change exogenous variables" option. The variable you change, however, is not RS but RSA. For Germany (GE), for example, you change GERSA, not GERS, after you have dropped equation 7 for GE. Similarly, if you drop equation 8, you change RBA, not RB. These changes pertain only to the EMU countries; for all other countries RS and RB are changed. When you click "Change exogenous variables," for a non EMU country, ignore RSA and RBA and use RS and RB.