Chris Sims' classic 1980 paper "Macroeconomics and Reality" still echoes, or should, among macro model builders and macro econometricians. He could not possibly be clearer about the "incredible" restrictions that models often impose, and proposed a way forward, the VAR in its many forms.
That method has evolved to the point where, for example, good econometricians can recast a DSGE model in VAR form and see if it survives the data. Often they don't, a recent example being Peter Ireland's DSGE so soundly rejected by Katarina Juselius.
The rub is in the qualifier good. This is not easy stuff to do correctly. But its power is worth the sweat. Sims has been homaged over his prize by Mark Thoma here, and by Jim Hamilton, the time series bible author here.
A very favorite story is when Sims, Robert Litterman, and Thomas Doan, all either at the Minneapolis Fed or U of Minnesota in the 80's, "took on" their big models with a small VAR and outforecast them by a bunch. They soon left, maybe excommunicated? But Sims and Litterman at least landed on their feet...Litterman just retired as head statistician at Goldman Sachs. So the Sims triumph validates a reality first approach, meaning data before theory, and with the tools we now have and careful work, this method will become ever more influential in applied macro. Sims has also contributed to Bayesian approaches to macro modeling.
I totally miss the logic of the pairing with Sargent, but such is academic politics.I agree.
PS: Links are there in the two here in Steve's post, and in the title of Sim's paper and Juselius name.
Well put. The WSJ tried to claim each of them as Non-Keynesians. Clearly not the case..
ReplyDeleteInteresting though that they gave Engle and Granger the prize for their work on cointegration in 2003, and the Sims in 2011. Kind of a reversed order, no?
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