Chain-type data and macro model properties: the DRI/McGraw-Hill experience

Article type: Research Article

Authors: Lasky, Mark J.^{a; *}

Affiliations: [a] DRI/McGraw-Hill, Lexington, MA, USA

Correspondence: [*] Congressional Budget Office, Ford House Office Building, Room 457, Washington, DC 20515, USA. Tel.: +1 202 226 2756; E-mail: markl@cbo.gov

Abstract: In January 1996, the Bureau of Economic Analysis switched from fixed-weighted GDP to chain-type GDP as its featured measure of real output, because fixed weights are appropriate only when the relative price structure of the economy does not change over time. This paper shows that the better microeconomic properties of the chain-type measures also help the simulation properties of a macroeconomic forecasting model. In particular, Laspeyres-based models often violate the assumption that marginal revenue equals marginal cost. This can produce unrealistic income and multiplier responses, which are eliminated by using chain-type output.

DOI: 10.3233/JEM-1998-0145

Journal: Journal of Economic and Social Measurement, vol. 24, no. 2, pp. 83-108, 1998