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The Econometric Analysis of Recurrent Events in Macroeconomics and Finance$
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Don Harding and Adrian Pagan

Print publication date: 2016

Print ISBN-13: 9780691167084

Published to Princeton Scholarship Online: January 2018

DOI: 10.23943/princeton/9780691167084.001.0001

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Using the Recurrent Event Binary States to Examine Economic Modeling Issues

Using the Recurrent Event Binary States to Examine Economic Modeling Issues

Chapter:
(p.143) Chapter 8 Using the Recurrent Event Binary States to Examine Economic Modeling Issues
Source:
The Econometric Analysis of Recurrent Events in Macroeconomics and Finance
Author(s):

Don Harding

Adrian Pagan

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691167084.003.0008

This chapter looks at using the binary states describing the recurrent events to help in either constructing economic models of time series or evaluating the fit of such models. The chapter provides a general discussion of the issues that come up when using the binary states in regressions. It then turns to the analysis of complete economic models. In these it is very common to see variance decompositions computed and used to draw conclusions about which shocks are responsible for the recurrent events. It is shown that this methodology is flawed when it comes to shedding light on what causes the business cycle. What can be done is investigated in the chapter, which illustrates how to determine which shocks are important to a matching of the business cycle features discussed in Chapter 5. The discussion moves on to some economic models that have been constructed in the wake of the global financial crisis and which aim to highlight the role of financial shocks.

Keywords:   binary states, recurrent events, economic models, time series, regression, financial shocks

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