Research Database

This paper is a case study of the use of vector autoregression (VAR) models to test economic theories. It focuses on the work of Christopher A. Sims, who in 1980 found that relationships in economic data generated by a small VAR model were inconsistent with those implied by a simple form of monetarist theory. The paper describes the work of researchers who criticized Sims' results as not robust and Sims' response to these critics. The paper reexamines all of this work by estimating hundreds of variations of Sims' model. The paper concludes that both Sims and his critics are right: Sims' conclusion about monetarism is robust, but some of his other statistical results are not. In general, the paper concludes that VAR models can be used to test theories, but that any relationships they uncover in the data must be carefully checked for robustness.

In a world where time series show clear seasonal fluctuations, rational agents will take account of those fluctuations in planning their own behavior. Using seasonally adjusted data to model behavior of such agents throws away information and introduces possibly severe bias. Nonetheless it may be true fairly often that rational expectations modeling with seasonally adjusted data, treating the adjusted data as if it were actual data, gives approximately correct results; and naive extensions of standard modeling techniques to seasonally unadjusted data may give worse results than naive use of adjusted data. This paper justifies these claims with examples and detailed arguments.

This paper, originally published in 1988, argues that there is nothing special about government-issued money, that without restrictions of some kind, privately issued money would be a perfect substitute for it. The paper describes the type of intermediation this argument implies for a laissez-faire economy. One important implication is that there would be only one risk-adjusted rate of return; either all assets would pay a low return to match that on money, or money would pay interest. Another important implication is that open market operations would be irrelevant. The paper argues that the reason we don't frequently observe economies with such characteristics is that governments generally impose restrictions which prevent the private issue of money. However, the paper does examine some historical periods when restrictions seemingly were not imposed. And it concludes with some reservations about the oversimplifying suggestion.

We provide an investigation of duration dependence in prewar business expansions, contractions, and whole cycles for France, Germany, and Great Britain. Our results, obtained using both nonparametric and parametric procedures, generally indicate the presence of positive duration dependence in expansions and whole cycles but not in contractions. Our results corroborate those of our earlier studies of the United States.