Quantitative Modeling

Presented by

Dr Tarun Das
 1.1 Purpose of Quantitative Modeling
Policy planning versus physical planning
Indicative planning versus target setting
Optimizing versus consistency approach
Partial/sectoral versus economy wide model
Selective versus all purpose model
Learning versus blue print approach
Consultancy versus dirigist approach
Monitoring trends versus forecasting future
Sound public investment versus overall
investment planning

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1.2 Dimensions of Quantitative Models
Macro models (National level)
Meso (Middle level)
Spatial (over space)
Regional (over regions)
Sectoral (over industries/ sectors)
Micro (at unit levels)
Inter temporal (over time)
Intergenerational (over generations)

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 1.3 Types of Models
• Static or dynamic models
• Short, medium, long term model
• Consistency or Behaviouristic or
Optimizing or Econometric models
• Closed or open economy model
• Economy wide or sectoral model
• Selective or All purpose model
• Comprehensive or partial model
• Deterministic or indeterminate

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 1.4 Desirable characteristics
of an Ideal Model
• Internal consistency
• Comprehensiveness with two-way feed backs
• Dynamic to take care of change over time
• Unique and stable solutions
• Easy testing and calibration of the model with
the help of available data, computer capacities
and algorithms, statistical techniques
• Model should be continually tested, reviewed,
Calibrated, monitored, updated, simulated and
improved to make it more realistic

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1.5 Advantage of Econometric Modeling

An Econometric Model helps:

 to formalize the system,
 to establish inter-relations
among major policy variables that
can be specified, calibrated,
tested, monitored, updated,
simulated and predicted with
certain degree of confidence, and
 to identify trade-off among
alternative policy options.
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 2.1 Steps in Econometric Modeling
 Specify objectives and purpose
 Have a sound theoretical basis
 Identification of potential variables
 Specification of equations
 Identification of equations
 Calibration of parameters
 Testing- Various goodness of fit
statistics- R-sq,  -sq, Theil index etc.
 Simulation and policy planning
Monitoring and updating
Prediction and Projection.

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 2.2 Econometric Modeling
Types of Data
• Time series
• Cross section
• Panel - Combination of time series and
cross section data
• Pooled- Combination of sectors/ regions

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 2.3 Types of variables
• Endogenous variables (determined
within the model) Ct, Yt
• Exogenous/ predetermined variable Wt
• Parameters  , , , , 
• Lagged variable Ct-1
• Instrumental variable Wt
• Dummy (binary, categorical, indicator,
qualitative, dichotomous) variable Dt
• Omitted variables
• Catch all variable (could be time trend)
Ct =  +  Yt +  Wt +  Ct-1 +  Dt
Dt = 1 if t is 1991 to 2003, 0 otherwise
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 2.4 Types of Equations
• Technical such as production function
• Behavioral such as consumption function
• Definitional such as capital/output ratio
• Identities such as Y = C + I + G
• Structural form
Ct =  1 +  1 Yt + Ut
It = 2 + 2 Yt + 3 Yt-1 + Vt
Yt = Ct + It + Gt
• Reduced form
Yt =  3 +  4 Yt-1 + 5 Gt + Wt
3 = (1 + 2 )/ 6, 4 = 3 / 6, 5 =1/ 6, 6 =1 -
1 - 2

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3.1 General Disagreements by
Modelers

“Let all the flowers flourish”

• General purpose versus single purpose model
• Normative versus descriptive model
• Policy oriented versus general understanding
• Short run versus long run model
• Large versus small model
• Top down versus bottom up model
• To guess or leave out crucial missing data
• How to deal with future economic agents,
technology change, prices and population?
• Whom should we address?

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3.2 General Agreements by Modelers
-1
• State your biases and intuitive arguments
• Computer models of social systems should not be
expected to produce precise results.
• Qualitative judgements from econometric models
are useful for policy formulation.
• Models should be selected to fit problems.
• Social environment and political economy may be
treated as given in the model.
• Models should be tested rigorously for the real
world with full range of policies.
• Substantial portion of resources should be used
for full documentation of the model.

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3.3 General Agreements by Modelers
-2
• Part of the model documentation should be
technically complete so that any other group can
test, calibrate and run the model.
• Part of the documentation should be clear and free
from jargons for general understanding by the non-
technical audience.
• Modelers should specify data sources and share
their data.
• Users and policy makers should be involved in the
modeling process.
• It is necessary to continually review, monitor,
update, upgrade, and simulate the model.

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 Thank you
Have a Good Day

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