RDP 7901: Estimation and Statistical Evaluation of an Economic Model 1. Introduction

This paper examines several econometric issues with a version of the RBA76 model of the Australian economy. In the RBA76 project, a linearised non-linear differential equation model is estimated by a full information maximum likelihood technique. Several issues arising from this approach, which have received little attention in the econometrics literature, are discussed in the curren paper. This study complements work on specification issues with the RBA76 model.

A summary of the criteria for evaluation of such a model is given, and the criteria used in the RBA76 project are reviewed. Linearisation of the model for estimation is examined, and simulations of the non-linear version of the model are presented and discussed. An attempt is made to test the independent effects of two features of the estimation procedure: the use of averaged data, and the pre-whitening process. The shape of the likelihood surface is examined, and OLS estimates of the model are given. Criteria additional to those originally employed in the RBA76 project are used for model evaluation.