302 Book reviews

stationarity of an ARIMA(2,0,0) model and for ury, and Bank of England economists, as wellinvertibility of an ARIMA(0,0,1) model. as several members of the academic modelling

One occurrence of the confusion of statistics teams supported by the UK’s ESRC Macro-and parameters is at the critical point of intro- economic Modelling Consortium. There is oneducing autocorrelation at lag k. In both equa- international contribution, from Ray Fair oftions for autocovariance (4.6) and autocorrela- Harvard.tion (4.7), parameters and their estimates are Although these papers do not have a commonequated. Adding to the confusion is a typing theme, they provide the reader with a prettyerror (a missing n-k in (4.6)) and an incorrect accurate impression of the current state of therange of time periods for the summation in the art in macro modelling, and the main issuesestimate for the covariance. concerning practitioners. The chapters of most

While the topics in the book are appropriate interest to the general reader are probably thosefor the level of targeted students, the fundamen- surveying important methodological issues. Intal mistakes make this an unusable book. My Chapter 1, Hendry and Clements report on theirrecommendation to the author and the publisher recent work on forecast failure due to structuralis to re-write the book with a knowledgeable breaks. This is a very important question,statistician as a co-author. A further point is that although it quite surprising how these authorsone should be very skeptical of the new study in focus exclusively on a world of linear dynamicsthe sample size determination chapter (Chapter (with Gaussian disturbances, for some reason!)12) until it has been refereed by experts. I since macroeconomic forecasting models arebelieve that the design of the study is flawed. notoriously nonlinear once identities are in-

corporated. The class of model to which theirAnne B. Koehler analysis is most appropriate, the cointegratingMiami University VAR, is however given a detailed treatment in

Oxford, OH Chapter 5, by Garratt, Lee, Pesaran and Shin.USA These authors make a case for the structural

cointegrating VAR, in contrast to leading alter-PII : S0169-2070( 01 )00087-5 native approaches, and report a five-equation

application to the UK economy. Melliss andWhittaker (Chapter 2) and Fisher and Whitley(Chapter 7) survey the activities of modellers atHM Treasury and the Bank of England respec-

Econometric Modelling: Techniques and Appli- tively, although in the former case, the reportcations, Sean Holly and Martin Weale (Eds.) takes the form of a fascinating analysis of the(2000), Cambridge: Cambridge University Treasury’s forecasting performance, for GDPPress, x1296 pages. ISBN 0 521 65069 0 and the RPI, over the past 25 years.Hardback £45, $74.95. Apart from these general-interest contribu-

tions, the papers in this volume mainly have aThis book collects together twelve recent specialized focus, reporting exercises in simula-

papers on macro-econometric modelling. Pub- tion and policy analysis, often using one orlished under the auspices of the National Insti- more of the established models. The particulartute for Economic and Social Research, it emphasis here is on monetary policy, the subjectincludes contributions from NIESR, HM Treas- of five of the papers. Of course, this has been a

Book reviews 303

matter of special interest in the period since the models. This is partly a case of ‘‘horses forBank became independent, and also in view of courses’’, but the merits of combining differentthe prospect of possible monetary union, whose types of model in the same exercise, forconsequences are the subject of Fair’s study crosschecking and adjustment, is an interesting(Chapter 8). In Chapter 9, Blake, Weale and aspect of their discussion.Young use the NIESR model to provide an The relative merit of statistical and econo-interesting twist to the ‘‘rules vs. discretion’’ metric forecasting models is another perennialdebate (the answer is to use both, apparently). question, most interestingly discussed byCook, Holly and Turner (Chapter 12) provide a Granger and Newbold in the 1975 volume, andwelcome examination of the policy implications very much the concern of Hendry and Clementsof non-linearity (asymmetric responses) in the in the current one. (David Hendry is the solebusiness cycle. The Phillips curve (Greenslade, contributor to both volumes, interestinglyHall, Henry and Nixon, Chapter 6), and the enough.) Perhaps the most significant singlesupply side (Church, Mitchell, Sault and Wallis, achievement of the past 25 years has been theChapter 11) are among several other topics attempted reconciliation of these two ap-treated here. proaches, in the cointegrating VAR framework.

I found it of some interest to compare these This is the approach adopted explicitly by atpapers with those in Renton (1975), the first least five of the present studies, including amajor report on the macro-modelling activities nonlinear variant, and seems to be the nearestsponsored by the (then) UK Social Science thing we have to an established paradigm forResearch Council. This earlier volume contains macro-econometrics.the proceedings of a 1972 conference, and Have we, then, made any progress in 25provides an interesting benchmark against years? The answer is, yes a great deal. How-which to assess the event-filled quarter century ever, a number of intractable problems remainof modelling research that has followed it. Back to be solved, of which allowing properly forthen the Lucas critique was still in the future, as structural change (barely a concern at all inwere error correction models and cointegration, 1975), and dealing with nonlinear dynamics, areand the UK models of the day (LBS, Treasury, probably the biggest.NIESR and Southampton) were innocent ofrational expectations. (These did feature in the James DavidsonPenn-MIT model of the US reported by Franco Cardiff Business SchoolModigliani, however.) Cardiff University

Apart from the various prominent develop- Cardiffments in theory and method, the most important

UKdistinction between then and now seems to bethe diminished role and status of the ‘big’,data-fitted, all-purpose econometric model. Intheir survey of the Bank of England’s model

Referencessuite in the present volume, Fisher and Whitleyare at pains to emphasise the range of models

G.A. Renton (ed.) (1975) Modelling the Economy. SSRCmaintained for different purposes, from the and Heinemann Educational Books.conventional econometric models to small,theory-based and calibrated representative-agent PII : S0169-2070( 01 )00086-3