BROOKINGS DISCUSSION PAPERS IN INTERNATIONAL ECONOMICS No. 138 SOME EXPERIMENTS IN CONSTRUCTING A HYBRID MODEL FOR MACROECONOMIC ANALYSIS

VAR analysis is a widespread method of quantitatively analyzing macro-economic issues. In this paper we examine the use of "hybrid" VAR models that retain the short-run features of a VAR but are designed to reproduce selected characteristics of calibrated models that are frequently used for the simulation of policy actions. The calibrated model we use is the McKibbin Sachs Global (MSG2) model of the world economy. For permanent shocks we constrain the long-run responses in the hybrid model to match those from MSG2. For transitory shocks we match shorter-run cumulative responses. The estimated effects of a permanent US money supply shock are broadly consistent with those of MSG2, but differ in some dimensions from those obtained from a standard recursive VAR.