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Stochastic Specification in an Aggregate Demand Model of the United Kingdom

David F. Hendry

Abstract

An eight equation dynamic model of aggregate demand in the United Kingdom is estimated by a variety of methods which make different assumptions about, and provide different treatments of, the problems of simultaneity and serial correlation, the latter being both within and between equations. Although the system appears to perform quite well on conventional criteria, the alternative estimators reveal a number of misspecifications and demonstrate the sensitivity of the results to estimators choice. The paper also considers the methodological problems involved in estimating dynamic simultaneous equation models with possibly auto-correlated errors using seasonally unadjusted quarterly data.