Dynamic Econometrics and Policy Analysis

Abstract

The objective of this thesis is to evaluate the effects of policy changes on economic activities in Korea. For this purpose, particular emphasis is placed on the aspects of econometric modelling. As the basic methodology, the research applies the dynamic modelling approach which combines the two current extreme approaches - the theory-based structural approach and the data-based VAR approach - and focuses on formulating statistically valid empirical models through extensive specification tests with particular attention to the critics of Lucas (1976) and Sims (1980), both of which are the damaging criticisms of the current approaches. These two issues are formally tested in this study rather than assumed.

Econometrically and empirically, the thesis contributes to the existing literature. Econometrically, the thesis extends the current LSE methodology in a more practical way. First, the thesis empirically demonstrates that care is required to required to formulate marginal models for the test of super exogeneity in identifying observational equivalence in ECM type models, if the effects of regime changes on the constancy of marginal models do not exhibit substantial changes, because of the possibility of 'spurious' non-constancy in marginal models. Second, the thesis shows how the test of weak exogeneity can be used to identify policy actions within a VECM. Third, the thesis questions why currently available macroeconomic models separately focus on evaluating the effects of transitory and permanent policy changes in a divergent way and argues that both changes should be evaluated jointly within a model. Possible econometric advantages with this approach are additionally discussed in the context of the invariant property of the underlying model and the usefulness of obtaining data information through both parameter spaces and error terms. As the basic approach, the thesis extends Hendry and Mizon's (1998) work into a structural multivariate framework by formally incorporating the usefulness of weak exogeneity tests in identifying policy actions.

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