Some experiments in constructing a hybrid model for macroeconomic analysis

Abstract

VAR analysis is a widespread method of quantitatively analyzing macroeconomic issues. In this paper we examine the use of “hybrid” VAR models that retain the short-run features of a VAR but are designed to reproduce selected characteristics of calibrated models that are frequently used for the simulation of policy actions. The calibrated model we use is the McKibbin-Sachs Global (MSG2) model of the world economy. For permanent shocks we constrain the long-run responses in the hybrid model to match those from MSG2. For transitory shocks we match shorter-run cumulative responses. The estimated effects of a permanent US money-supply shock are broadly consistent with those of MSG2, but differ in some dimensions from those obtained from a standard recursive VAR.