Simulation of econometric models

The purposes of this tutorial are to present some fundamental properties of econometric model structures relevant to effective understanding of simulation procedures, and to describe the use of simulation software for analysis and forecasting. The fundamental concepts of model specification are developed formally to provide a logical foundation for model construction and simulation procedures. The concepts of integrated and causal structures, reduced and final forms are examined and related to issues of: empirical identification and statistical estimation; interpretation; and computation. Procedures for decomposition of causal systems into ordered subsets of equations are outlined. The formal analysis is supplemented with specific examples. The dynamic simulation capabilities of several available simulation software systems are described in general terms and specific procedures for loading and simulating econometric models with the California Economic Forecasting Project/Interactive Model Simulator (CEFP/IMS) system are given. Procedures for generation of' dynamic multipliers, incorporation of judgment in forecasting and forecast error analyses are discussed. The session is concluded with an on-line demonstration of the CEFP/IMS.