Model simplification and variable selection: A Replication of the UK inflation model by Hendry (2001)

Blazejowski, Marcin and Kufel, Paweł and Kwiatkowski, Jacek (2018): Model simplification and variable selection: A Replication of the UK inflation model by Hendry (2001).

Abstract

In this paper, we revisit the well-known UK inflation model by Hendry (Journal of Applied Econometrics 2001, 16:255-275. doi: 10.1002/jae.615). We replicate the results in a narrow sense using the gretl and PcGive programs. In a wide sense, we extend the study of model uncertainty using the Bayesian averaging of classical estimates (BACE) approach to compare model reduction strategies. Allowing for the investigation of other specifications, we confirm the same set of significant determinants but find that Hendrys' model is not the most probable.

• Item Type: MPRA Paper
• Language: English
• Keywords: BACE, gretl, model uncertainty, reduction strategy
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Błażejowski, M., & Kwiatkowski, J. (2018). Bayesian Averaging of Classical Estimates (BACE) for gretl (gretl working papers No. 6). Universita’ Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

Clements, M. P., & Hendry, D. F. (2008). Chapter 1 Forecasting Annual UK Inflation Using an Econometric Model over 1875–1991. In Forecasting in the presence of structural breaks and model uncertainty (pp. 3–39). Emerald Group Publishing Limited. doi: 10.1016/S1574-8715(07)00201-1

Cottrell, A., & Lucchetti, R. (2018, August). Gretl User’s Guide [Computer software manual]. Retrieved from http://ricardo.ecn.wfu.edu/pub/gretl/manual/PDF/gretl-guide-a4.pdf

Doornik, J. A. (2009, May). Autometrics. In J. Castle & N. Shephard (Eds.), The Methodology and Practice of Econometrics: A Festschrift in Honour of David F. Hendry. Oxford University Press. doi: 10.1093/acprof:oso/9780199237197.001.0001

Doornik, J. A., & Hendry, D. F. (2013). Empirical Econometric Modelling – PcGive 14 (Vol. I). London: Timberlake Consultants Ltd.

Doppelhofer, G., & Weeks, M. (2009). Jointness of growth determinants. Journal of Applied Econometrics, 24, 209–244. doi: 10.1002/jae.1046

Fernández, C., Ley, E., & Steel, M. F. J. (2001). Benchmark Priors for Bayesian Model Averaging. Journal of Econometrics, 100, 381–427. doi: 10.1016/S0304-4076(00)00076-26

Hendry, D. F. (2001). Modelling UK Inflation, 1875–1991. Journal of Applied Econometrics, 16, 255–275. doi: 10.1002/jae.615

Hendry, D. F., & Krolzig, H.-M. (2001). Automatic Econometric Model Selection Using PcGets. London: Timberlake Consultants Press.

Koop, G., Poirier, D. J., & Tobias, J. L. (2007). Bayesian Econometric Methods. New York: Cambridge University Press. doi: 10.1017/CBO9780511802447

Ley, E., & Steel, M. F. (2012). Mixtures of g-priors for Bayesian model averaging with economic applications. Journal of Econometrics, 171, 251–266. doi: 10.1016/j.jeconom.2012.06

Sala-i-Martin, X., Doppelhofer, G., & Miller, R. I. (2004, September). Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach. The American Economic Review, 94, 813–835. doi: 10.1257/0002828042002570