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The Size of Dynamic Econometric Models
Yves Balasko
Abstract
This paper investigates the performances of dynamic econometric models in relationship to their size. More precisely, the central issue addressed in this paper is whether there exists a procedure that systematically associates with every large-scale model a small-scale model that constitutes a reasonably good approximation of the large-scale model. Such a procedure is shown to exist for both endogenous and exogenous variables. This result is applied to show that a model with approximately twenty endogenous and four hundred exogenous variables can do almost as well as the current models with thousands of variables. This result also implies that a necessary condition for small models of twenty to thirty variables to perform satisfactorily is that only regular patterns of variations for the exogenous variables be considered.
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