Empirical Macroeconomics
Methods and Problems

A joint workshop at ECARE, Université Libre de Bruxelles on 'Empirical Macroeconomics; What Methods for What Problems?' was held on 2/3 June. The workshop was organized by Lucrezia Reichlin (ECARE and CEPR), and formed part of CEPR's research programme on 'Macroeconomics, Politics and Growth in Europe', funded by the European Commission's Human Capital and Mobility programme. The workshop focused on new methods for the empirical modelling of business cycles and growth.

One main theme was how to extract information on the dynamic behaviour of cross-sections of countries, regions and sectors. Major questions were how to test empirically for convergence of income per capita across countries without losing information of possibly heterogeneous behaviour by arbitrarily averaging across countries and time. Alain Desdoigts (Paris Dauphine) in 'Changes in the World Income Distribution: A Non-parametric Approach to Challenge the  Neoclassical Convergence Argument', and Danny Quah (LSE and CEPR) in 'Dynamic Patterns of Growth and Convergence', described econometric methods for studying the dynamics of cross-sectional distributions. In 'The Poor Stay Poor: Non-convergence Across Countries and Regions', Fabio Canova and Albert Marcet (Universitat Pompeu Fabra, Barcelona and CEPR) analysed convergence rates of income per capita for different European regions and proposed a method whereby different convergence rates to different steady states for each cross-sectional unit are possible. When this diversity is allowed, convergence to each unit to its own steady state income level is much faster than previously estimated (greater than 2% per annum), but cross-sectional differences remain. In 'Time-series Estimation of Convergence Rates', Ron Miller (Columbia University) also showed that by imposing the restriction that countries' output per capita converge to the same steady state, cross-sectional regressions mismeasure convergence rates. But in 'Let'sGet Real: A Dynamic Factor Analytical Approach to Disaggregated Business Cycle', Mario Forni (Università di Modena) and Lucrezia Reichlin proposed a framework to estimate the dynamics of large cross-sections and to identify the common dynamic component of out put and productivity in manufacturing due to technological innovations.

A second theme of the workshop was validation of business cycle models. In 'Dynamic Equilibrium Economies: A Framework for Comparing Models and Data', Francis Diebold, Lee Ohanian and Jeremy Berkovitz (University of Pennsylvania) proposed a framework for assessing agreement between (generally misspecified) dynamic equilibrium models and data. In 'Money, Prices, Interest Rates, and the Business Cycle', Robert King (University of Virginia) and Mark Watson (Northwestern University), investigated the relationship of money, prices and interest rates to business cycles, and matched key empirical facts with a real business cycle modal, a sticky price modal and a liquidity effect modal. They concluded that while the models have diverse successes and failures, none can account for the fact that real nominal interest rates are 'inverted leading indicators' of real economic activity.

Other themes of the workshop included the analysis of aggregate behavioural outcomes when individuals are allowed to interact: William Brock and Stephen Durlauf (University of Wisconsin) presented 'Discrete Choice with Social Interactions; identification in cointegrated systems: Hashem Pesaren and Yongcheol Shin (University of Cambridge) presented 'Long-run Structural Modelling'; and purchase behaviour of automobiles in a microeconomic data set: Orazio Attanasio (University College London and CEPR) presented 'Consumer Durables and Inertial Behaviour'.