FAIR’S MODEL OF THE U.S. ECONOMY
TERM PAPER

INTRODUCTION

In his work “Specification, Estimation and Analysis of Macroeconometric Models” Prof. Fair of Harvard (now Yale) developed among other things an econometric model of the US economy. In this paper I will focus on the construction of this model. This stage is a transition from a theoretical to an econometric model. It is of high importance, that the main features of the theoretical model are properly transformed in the econometric system of equations.
The theory underlying this model is based on
§ The assumption of maximizing behaviour,
§ The explicit treatment of disequilibrium effects,
§ And the accounting for balance-sheet constraints.

DATA AND SPECIFICATION OF THE MODEL
DATA
The first step in the construction of an empirical model is to collect the raw data, create the variables of interest from the raw data, and separate the variables into exogenous variables, endogenous variables explained by identities, and endogenous variables explained by estimated equations.
The data were taken from the Flow of Funds Accounts and National Income and Product Accounts, as published in the Survey of Current Business.
Given the tables in appendix, it should be possible to duplicate the collection of the data with no help from the author. Although one would seldom want to do this, this kind of detail should be presented if at all feasible: it has the obvious scientific merit of allowing for reproducibility of results.
HOUSEHOLD SECTOR
The two main decision variables of a household in the theoretical model are consumption and labour supply. The determinants of these variables include the initial value of wealth and the current and expected future values of the wage rate, the price level, the interest rate, the tax rate, and the level of transfer payments. The labour constraint also affects the decisions if it is binding. The aim of the econometric work is to match the decision variables and the determinants of the variables to observed aggregate variables and then to estimate equations explaining the aggregate variables.
THE SEARCHING PROCEDURE
Much searching was done in arriving at the final estimated equations for the household sector.