Previous Versions and References
MC1 Model
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MC2 Model
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You should read about the current versions of the models before reading the following. The dates and references for the MC2 model are:

MC2 Model

The order of the reading for the MC2 model should be:

  1. Macroeconometric Modeling (MC2 Version) : at least skim this.
  2. About MC2 User Datasets.
  3. The MC2 Model Workbook : Preface and Chapter 1, particularly Section 1.4.
The dates and references for the MC1 model are:

MC1 Model

Note: Although the version of the US model used in the MC1 model has the same date (May 9, 1997) as the US model forecast (BASE971), the version used for the forecast is slightly different from the version that is part of the MC1 model. The price and wage equations, equations 10 and 16, in the version used for the forecast differ slightly from those used in the MC1 model.

The order of the reading for the MC1 model should be:

  1. Testing Macroeconometric Models (MC1 Version) : at least skim this.
  2. About MC1 User Datasets.
  3. The MC1 Model Workbook : Preface and Chapter 1, particularly Section 1.4.

Earlier versions of the US model are:

US Model (November 1, 1996)

Note: Appendix B and the Chapter 6 tables, which pertain to the ROW model, are the same in both Testing Macroeconometric Models (MC1 Version) and The MC1 Model Workbook, but Appendix A and the Chapter 5 tables, which pertain to the US model, are not. The US model dated November 1, 1996, is the one discussed in Testing Macroeconometric Models (MC1 Version), whereas the US model dated May 9, 1997, is the one used for the MC1 model.

US Model (September 5, 1993)

  • Equations: Appendix A and the tables in Chapter 5 in the 1994 book.
  • Discussion: The 1994 book.
Note: The version of the US model that is presented in Chapter 5 and Appendix A of the 1994 book is very similar to the version used for the September 5, 1993, forecast. However, a few small changes were made in going from the version used for this forecast to the final version used for the experiments in the book.

The following lists the order of the changes that have been made to the US model since November 1, 1996. As noted above, the November 1, 1996, version of the US model is presented and discussed in Testing Macroeconometric Models (MC1 Version). The following changes are in the order in which they were made. Some of the changes are superceded by later changes.

Changes to the US model from November 1, 1996, to the present

  • Beginning with the February 1, 1997, version, a time trend is included as an explanatory variable in equation 9. The revised flow of funds data on MH showed a large fall over time that does not seem capable of being explained with the standard economic variables.
  • Beginning with the May 9, 1997, version, lambda is .65 instead of .70 and eta is .4 instead of .3 in equation 29. See the discussion in Section 5.9 in the 1994 book for how these values are estimated.
  • Beginning with the August 4, 1997, version, the specification of the price and wage equations (equations 10 and 16) is similar to that in Table 5 in Testing the NAIRU Model for the United States. Equation 10 differs from the price equation in Table 5 in that it uses as the demand pressure variable log[(YS-Y)/YS + .04] instead of the unemployment rate. Equation 16 differs from the wage rate equation in Table 5 in that it does not include a demand pressure variable.
  • Beginning with the November 11, 1997, version, the variable TXCR*IKFA is not included in equation 12.
  • Beginning with the November 11, 1997, version, lambda is .65 instead of .50 in equation 19.
  • Beginning with the November 11, 1997, version, revised NIPA data from 1958:4 were available and were used. New data on fixed reproducible tangible wealth were also used for the first time for this version.
  • The 1997 second quarter revisions of the flow of funds data led to the following changes beginning with the November 11, 1997, version. 1) The Nonfarm Noncorporate Business sector and the Farm Business sector in the flow of funds accounts are moved from the household sector to the firm sector in the model. This resulted in the following exogenous variables being dropped from the model: IVH, IVVH, PIEH, and TFA. 2) Equation 88, which determined variable INTROW, is dropped from the model, and INTROW is taken to be exogenous. In addition, INTROW is now taken to be net interest payments instead of net interest receipts of the foreign sector, which reverses the sign of the variable. 3) DISBA is dropped from equation 73; -WLDF+WLDG+WLDF+DISBA is added to equation 67; -WLDF+WLDG+WLDS is added to equation 70; and +WLDF-WLDG-WLDS-DISBA is added to equation 80. 3) SUR and MRS are dropped as separate variables in the model and absorbed in the discrepancy variables.
  • Beginning with the November 3, 1998, version, the asset variable, log(AA/POP){-1}, is dropped from equation 7.
  • Beginning with the November 3, 1998, version, equation 9 is estimated under the assumption of no serial correlation of the error term instead of first order serial correlation.
  • Beginning with the November 3, 1998, version, in equation 10 logPF{-1} is no longer subtracted from logPIM. This does not affect equation 10 because logPF{-1} is a separate explanatory variable, but it affects the coefficient restriction on the wage equation.
  • Beginning with the November 3, 1998, version, WLDF is no longer subtracted from compensation in constructing the data for WF, which affects the identities 65, 67, and 68.
  • Beginning with the January 30, 1999, version, the interest rate variable is dropped from the fixed investment equation, equation 12. I have been unable to find significant cost of capital effects in the investment equation, and the (insignificant) interest rate variable that I had been using in this equation now has a coefficient estimate of the wrong sign. Alas.
  • Beginning with the May 1, 1999, version, the lagged value of the asset variable, AA/POP, is added to the durable expenditures equation, equation 3. It now appears possible to pick up a wealth effect on durable expenditures.
  • Beginning with the July 30, 1999, version, the lagged value of the log of the asset variable, AA/POP, is added to the consumption of services, equation 1. It now appears possible to pick up a wealth effect on consumption of services.
  • The following changes were made beginning with the November 5, 1999, version:
    • Equation 5 (L1, labor force--men 25-54): The Z variable has been dropped.
    • Equation 6 (L2, labor force--women 25-54): The Z variable has been dropped.
    • Equation 7 (L3, labor force--all others 16+): The Z variable has been replaced by the unemployment rate, UR.
    • Equation 8 (LM, number of moonlighters): The Z variable has been replaced by the unemployment rate, UR.
    • Equation 10 (PF, private nonfarm price deflator): The gap variable has been replaced by the unemployment rate, UR.
    • Equation 12 (KK, stock of capital): This equation replaces the old equation 12, which explained IKF, nonresidential fixed investment. IKF is now explained by the identity 92, which before determined KK. Identity 92 now is: IKF = KK - (1 - DELK)*KK-1. The new equation 12 has on the left hand side logKK and on the right hand side logKK-1, logKK-2, logY, logY-1, logY-2, logY-3, logY-4, logY-5, and RB*(1-D2G-D2S). This change overrides the change mentioned above that was made to equation 12 beginning with the January 30, 1999, version.
    • Equation 21 (CCF, capital consumption of the firm sector): This equation is now estimated under the assumption of first order serial correlation of the error term.
    • Equation 27 (IM, imports): The lagged value of the log of the asset variable, AA/POP, has been added. It now appears possible to pick up a wealth effect on imports.
    • Equation 30 (RS, three month Treasury bill rate): The variable JJS has been replaced by the unemployment rate, UR.
  • The following changes were made beginning with the January 29, 2000, version:
    • Equation 30 (RS, three month Treasury bill rate): The variable PCGDPR (percentage change in real GDP) has been replaced by the change in UR.
    • Equation 89 (AA, total net wealth): This identity is now: AA = (AH + MH)/PH + (PIH*KH)/PH. This change allows capital gains on housing to affect AA. PIH*KH is an estimate of the nominal value of the housing stock. When housing prices increase faster than the overall price level, PIH increases relative to PH, and so (PIH*KH)/PH increases. Before the second term was only KH, which was in effect multiplying KH by PH instead of PIH.
  • The following changes were made beginning with the July 31, 2000, version:
    • Equation 11 (Y, production of the firm sector): The constant term is now dropped from the equation.
    • Equation 19 (INTF, interest payments of the firm sector): There is now a simpler specification for INTF. INTF equals (1/400)*RB*(-AF) plus an exogenous variable (DINTF) that makes the equation fit perfectly within the estimation period. It is difficult to link INTF, which is from the NIPA accounts, to AF, which is from the Flow of Funds accounts, and the current specification seems about as good as any.
    • Equation 20 (IVA, inventory valuation adjustment): The constant term is now dropped from the equation.
    • Equation 25 (CG, capital gains or losses on corporate stocks held by the household sector): The left hand side variable is now CG/GDP-1 instead of just CG, and the cash flow explanatory variable is now also divided by GDP-1: [<>(CF-TFG-TFS)]/GDP-1.
    • Equation 27 (IM, imports): The income variable has been replaced by consumption plus fixed investment: log[(CS+CN+CD+IHH+IKF+IHB+IHF+IKB+IKH)/POP]. The interest rate variable has been dropped. IM is now in effect run off of consumption plus fixed investment rather than being determined by a separate demand equation. This change overrides the change mentioned above that was made to equation 27 beginning with the November 5, 1999, version.
    • Equation 29 (INTG, interest payments of the government sector): There is now a simpler specification for INTG. INTG equals (1/400)*(.2*RS + .8*RB)*(-AG) plus an exogenous variable (DINTG) that makes the equation fit perfectly within the estimation period. It is also difficult to link INTG, which is from the NIPA accounts, to AG, which is from the Flow of Funds accounts, and again the current specification seems about as good as any.
  • The following changes were made beginning with the October 30, 2000, version:
    • Equation 19 (INTF, interest payments of the firm sector): The specification for INTF is now (1/400)*(.3*RS+.7*(1/8)*(RB+RB-1+RB-2 +RB-3+RB-4 +RB-5+RB-6+RB-7))*(-AF) plus the exogenous variable (DINTF) that makes the equation fit perfectly within the estimation period.
    • Equation 27 (IM, imports): The time trend T has been added to the equation.
    • Equation 29 (INTG, interest payments of the government sector): The specification for INTG is now (1/400)*(.2*RS+.8*(1/8)*(RB+RB-1+RB-2 +RB-3+RB-4 +RB-5+RB-6+RB-7))*(-AG) plus the exogenous variable (DINTG) that makes the equation fit perfectly within the estimation period.
  • The following changes were made beginning with the April 27, 2001, version:
    • Equation 17 (MF, demand deposits and currency--f): The after-tax interest rate is now lagged once rather than unlagged.
    • Equation 19 (INTF, interest payments of the firm sector): Equation 19 is now estimated. INTF/(-AF) is taken to depend on a constant, the lagged value of INTF/(-AF), and the variable .75*(1/400)*(.3*RS+.7*(1/8)*(RB+RB-1+RB-2 +RB-3+RB-4 +RB-5+RB-6+RB-7)). The coefficients on the second and third variables are constrained so that in the long run a k point change in the third variable leads to a k point change in INTF/(-AF). The equation is estimated under the assumption of a first order autoregressive error term.
    • Equation 25 (CG, capital gains or losses on corporate stocks held by the household sector): The earnings variable is now [<>(PIEF-TFG-TFS+PX*PIEB-TBG-TBS)]/GDP-1.
    • Equation 29 (INTG, interest payments of the government sector): Equation 29 is now estimated. INTG/(-AG) is taken to depend on a constant, the lagged value of INTG/(-AG), and the variable .75*(1/400)*(.3*RS+.7*(1/8)*(RB+RB-1+RB-2 +RB-3+RB-4 +RB-5+RB-6+RB-7)). The coefficients on the second and third variables are constrained so that in the long run a k point change in the third variable leads to a k point change in INTG/(-AG).
  • The following change was made for the July 27, 2001, version:
    • Equation 9 (MH, demand deposits and currency--h): The equation is estimated under the assumption of a fourth order autoregressive error.
  • The following changes were made for the November 1, 2001, version:
    • Equation 9 (MH, demand deposits and currency--h): The equation has an exogenous variable, T941A, added, which equals T-168 from 1994:1 on and 0 otherwise. The equation is estimated under the assumption of no autoregressive error term.
    • Equation 11 (Y, production--f): The equation is now estimated in log form.
  • The following changes were made for the January 31, 2002, version:
    • Equation 1 (CS, consumer expenditures: services): The time trend T has been added to the equation.
    • Equation 5 (L1, labor force--men 25-54): The variables log(WA/PH) and T have been dropped, and the variables log(AA/POP)-1 and UR have been added.
    • Equation 6 (L2, labor force--women 25-54): The variable log(AA/POP)-1 has been added.
    • Equation 7 (L3, labor force--all others 16+): The Variable T has been dropped, and the variable log(AA/POP)-1 has been added.
    • Equation 9 (MH, demand deposits and currency--h): The variable T941A, which was added for the November 1, 2001, version, has been dropped, and the equation is now estimated under the assumption of a fourth order autoregressive error term.
    • Equation 11 (Y, production--f): The dummy variables D593, D594, and D601 have been added to pick up the effects of the steel strike.
    • Equation 12 (KK, stock of capital--f): The interest rate variable has been dropped.
    • Equation 13 (JF, number of jobs--f): All variables related to DD772 have been dropped, and variable T has been dropped. The dummy variable D593 has been added to pick up effects of the steel strike. The excess labor variable is now defined to be log[JF/(JHMIN/HFS)]-1.
    • Equation 14 (HF, average number of hours paid per job--f): All variables related to DD772 have been dropped, and variable T has been dropped. The excess labor variable is now defined to be log[JF/(JHMIN/HFS)]-1, and logHF-1 is replaced by log(HF/HFS)-1..
    • Equation 21 (CCF, capital consumption--f): The dummy variables D811824 and D831834 have been dropped, and the equation is now estimated under the assumption of no serial correlation of the error term.
    • Equation 27 (IM, imports): The variable T has been dropped, and the equation is now estimated under the assumption of a second order autoregressive error term.
    • All the equations that are estimated by 2SLS have been estimated using fewer first stage regressors. None of the equations now rejects the overidentifying restrictions at the 95 percent confidence level. .
  • The following changes were made beginning with the April 27, 2002, version:
    • Equation 12 (KK, stock of capital--f): An interest rate variable has been added back in, which is an estimate of the real AAA bond rate lagged twice. In addition, another cost of capital variable has been added: (CG-2 + CG-3 + CG-4)/ (PX-2YS-2 + PX-3YS-3 + PX-4YS-4).
    • Equation 25 (CG, capital gains or losses on corporate stocks held by h): The divisor is now PX-1YS-1 rather than GDP-1.
  • The following changes were made beginning with the January 30, 2003, version:
    • Equation 3 (CD, consumer expenditures: durables): The left hand side variable is now CD/POP - (CD/POP)-1, and on the right hand side (CD/POP)-1 has been replaced by DELD*(KD/POP)-1 - (CD/POP)-1. This incorporates a slightly different partial adjustment assumption.
    • Equation 4 (IHH, residential investment--h): The left hand side variable is now IHH/POP - (IHH/POP)-1, and on the right hand side (IHH/POP)-1 has been replaced by DELH*(KH/POP)-1 - (IHH/POP)-1. This incorporates a slightly different partial adjustment assumption. Also, the asset variable has been dropped from the equation.
    • Equation 9 (MH, demand deposits and currency--h): A dummy variable has been added that is 1 in 1998:1 and 0 otherwise.
    • Equation 12 (KK, stock of capital--f): The left hand side variable is now log(KK/KK-1), and the right hand side variables are in addition to the two cost of capital variables: the constant term, log(KK/KKMIN)-1, log(KK-1/KK-2, and five change in output terms. log(KK/KKMIN)-1 is an estimate of the amount of excess capital on hand.
    • Equation 17 (MF, demand deposits and currency--f): A dummy variable has been added that is 1 in 1998:1 and 0 otherwise.
    • Equation 21 (CCF, capital consumption--f): Nine dummy variables have been added to account for tax law changes. The constant term has also been added.

    Some of the changes from November 5, 1999, on have lessened the reliance of the model on peak to peak interpolations. Variables Z, JJS, and the output gap variable have been replaced by UR. This means that Z and JJS are no longer needed in the model. This change also eliminates equations 96 and 97. These variables and equations have been retained in the software, but they play no role in the solution of the model.

    The different treatment of INTF and INTG beginning with the July 31, 2000, version means that three variables have been dropped from the model---BF, BG, and TI.

    The Version of the ROW Model Prior to the 1994 Book

    The first version of the ROW model was presented in Fair (1984), Chapter 4. Some of the main changes that were made between the model in the 1984 book and the model in the 1994 book are the following. First, the number of countries (not counting the United States) for which structural equations were estimated was decreased from 42 to 37, and the trade share matrix was changed from 65 x 65 to 59 x 59. Some countries were dropped because of poor data, and some were added. Second, OECD data were used whenever possible rather than IFS data. The OECD has better NIPA and labor data than is available from the IFS data. Third, annual data were used for countries in which only annual NIPA data existed. In the 1984 version, quarterly data were constructed for all the countries by interpolating the annual data. Fourth, wage, employment, and labor force equations were added to the model (equations 12-15). Fifth, estimates of the capital stock of each country were made, and the capital stock variable was used in the investment equation. (This change, however, was later nullified because of the difficulty of getting good capital stock data.) Finally, a few more coefficient constraints were imposed.