Background
A recursive model is a specialized form of the simultaneous equations model that simplifies the process of parameter estimation in economic systems. It relies on a specific matrix structure and the absence of contemporaneous correlation of random errors, allowing for a step-by-step identification and computation of parameters within the model.
Historical Context
The concept of recursive modeling has its roots in the history of econometrics, emerging as a solution to the complexities inherent in simultaneous equations models. The development of such models gained traction in the mid-20th century as researchers sought more manageable ways to estimate the interdependencies in economic systems.
Definitions and Concepts
A recursive model, also known as a triangular system, is defined by the following key properties:
- Triangular Coefficient Matrix: The matrix of coefficients for the current endogenous variables is triangular. This ensures a specific ordering that simplifies solution derivation.
- No Contemporaneous Correlation: There is no contemporaneous correlation of random errors across equations, which avoids the complications of joint error terms.
Major Analytical Frameworks
Classical Economics
Classical economists did not utilize econometric models like the recursive model, as it was developed much later. However, understanding their supply-and-demand frameworks can help interpret the structural relationships modeled by recursive systems.
Neoclassical Economics
Neoclassical economists focus on optimizing behavior and equilibrium states, often using mathematical and statistical methods. Recursive models align well with their emphasis on clarity and tractable solutions.
Keynesian Economics
Keynesian models incorporate demand-driven views of the economy that may involve various feedback mechanisms. Recursive models help simplify these inherently complex systems by isolating sequential equations for easier estimation.
Marxian Economics
Marxian analysts critique the structures and relations within capitalist systems without heavily relying on recursive econometric models. The recursive model’s constraints on correlation might limit its applicability to Marxian explorations of systemic interrelations.
Institutional Economics
Institutional economists consider the broader socio-economic systems and cultural factors affecting economic phenomena, where recursive models can help understand hierarchical decision processes.
Behavioral Economics
Behavioral economics interrogates non-rational behaviors which may be hard to model using strict recursive frameworks due to their assumptions of clarity and simplicity.
Post-Keynesian Economics
Post-Keynesian economists might employ recursive models to study sequential economic processes, recognizing the importance of identified equations but often questioning their simplifications.
Austrian Economics
Austrian economists emphasize individual actions over aggregate models, so they would probably see recursive models as still somewhat reliant on structured, aggregate assumptions they often find problematic.
Development Economics
In studying the successive stages of development, recursive models can be instrumental in structuring relations across variables in sequential stages, aiding in identifying and assessing impactful policies.
Monetarism
Recursive models can align well with monetarist emphasis on quantifiable relationships between economic variables, specifically in sequential changes influenced by monetary policy.
Comparative Analysis
Recursive models contrast with traditional simultaneous equations models by providing a simplified, step-by-step parameter estimation approach. The absence of contemporaneous correlation of errors and the matrix’s triangular form alleviate the computational complexity typically associated with more convoluted simultaneous systems.
Case Studies
- Impact of Monetary Policy: A recursive model might be employed to dissect the sequential impacts of interest rate changes on various sectors.
- Developmental Economics: Examining steps of economic development in a region to identify stages and corresponding policies.
Suggested Books for Further Studies
- “Econometric Analysis” by William H. Greene - Covers various econometric models, including recursive models.
- “Microeconometrics: Methods and Applications” by A. Colin Cameron and Pravin K. Trivedi - Details advanced econometric modeling, with sections relevant to recursive models.
- “Econometric Models and Economic Forecasts” by Robert S. Pindyck and Daniel L. Rubinfeld - Practical guide to model application including recursive systems.
Related Terms with Definitions
- Simultaneous Equations Model: Economic models comprising multiple interrelated equations estimated together.
- Endogenous Variables: Variables determined within the system being studied, influenced by the other equations’ variables.
- Triangular Matrix: A matrix arranged such that parameters can be calculated recursively without the need for iterative, simultaneous estimation.
- Contemporaneous Correlation: Measure of how random errors across different equations relate at the same point in time, absent in recursive models.
