Most interesting questions in macroeconomics concern the behavior of unobservables; they become answerable only if they are couched in terms of structural models. To use data to evaluate the model, researchers require identifying assumptions which come from outside the model. The recent direction taken in macroeconomics has been to develop a structural model and ignore many observed relationships among US macroeconomic variables or to analyze macroeconomic data with little regard for economic theory. In many cases, the necessary identifying assumptions are never made explicit. This project develops a new methodology for estimating and analyzing dynamic, stochastic, general equilibrium macroeconomic models. The methodology involves expanding the stochastic rank of the model and imposing enough restrictions on the model so that is just-identified. The technique permits the analysis of models which fit all statistical relationships in the data set. Models with a limited number of shocks cannot do this. Unlike most current analyses of macroeconomic models, it does not require unnecessary ad hoc restrictions in the model. The questions studied using this new methodology include: Is the slowdown in the growth rate of measured productivity since 1973 due to changes in actual productivity or due to an increase in the growth rate of (unobservable) quality of goods? Is there a stable money demand function? How does the presence of an underground economy affect the choice of optimal monetary policies? The productivity slowdown of the past two decades has been well- documented. Productivity growth declines from 2.9% over the period 1957 to 1973 to an average of 0.5% since 1973. This has been explained as due to the rise in oil prices in the early 1970s, a decline in technological progress, or a measurement error caused by a failure to adjust adequately for the higher quality of outputs. The methodology developed in this project can be used to distinguish among these explanations. The importance of the oil price shock is analyzed by examining the obsolescence of the capital stock and the 1973 price hike, the later, lesser increase in 1979, and the disintegration of OPEC during the 1980s.
