Econometrica: Jan, 1984, Volume 52, Issue 1

The Size of Dynamic Econometric Models

https://doi.org/0012-9682(198401)52:1<123:TSODEM>2.0.CO;2-Z
p. 123-142

Yves Balasko

This paper investigates the performances of dynamic econometric models in relationship to their size. More precisely, the central issue addressed in this paper is whether there exists a procedure that systematically associates with every large-scale model a small-scale model that constitutes a reasonably good approximation of the large-scale model. Such a procedure is shown to exist for both endogenous and exogenous variables. This result is applied to show that a model with approximately twenty endogenous and four hundred exogenous variables can do almost as well as the current models with thousands of variables. This result also implies that a necessary condition for small models of twenty to thirty variables to perform satisfactorily is that only regular patterns of variations for the exogenous variables be considered.