Research Publication

November 2017

Time Series Econometrics in Macroeconomics and Finance

Lars Peter Hansen

Ninety years ago, Slutsky (1927) and Yule (1927) opened the door to the use of probability models in the analysis of economic time series. Their vision was to view economic time series as linear responses to current and past independent and identically distributed impulses or shocks. In distinct contributions, they showed how to generate approximate cycles with such models. Each had a unique background and perspective. Yule was an eminent statistician who, in the words of Stigler (1986), among his many contributions, managed effectively to invent modern time series analysis.” Yule constructed and estimated what we call a second-order model and applied it to study the time series behavior of sunspots. Slutsky wrote his paper in Russia in the 1920s motivated by the study of business cycles. Much later, his paper was published in Econometrica, but it was already on the radar screen of economists, such as Frisch. Indeed Frisch was keenly aware of both Slutsky (1927) and Yule (1927) and acknowledged both in his seminal paper Frisch (1933) on the impulse and propagation problem. Building on insights from Slutsky and Yule, Frisch pioneered the use of impulse response functions in economic dynamics. His ambition was to provide explicit economic interpretations for how current period shocks alter economic time series in current and future time periods. The Journal of Political Economy (JPE) provided an important platform for research that confronts Frisch’s ambition in substantively interesting ways. Read full paper here.

Journal: “The Past, Present, and Future of Economics: A Celebration of the 125 Year Anniversary of the JPE and of Chicago Economics,” Journal of Political Economy 125 (December). (forthcoming)|Publisher: University of Chicago Press |Tags: Econometrics|