- Macroeconomists have a general approach to study questions of interest:
- Document the facts
- Develop a model
- Compare predictions of the model with original facts
- Use the model to make other predictions that will eventually be tested
- Models simplify the complicated real world into its most relevant elements.
- A model is useful if it has good predictive power.
- Economic models often involve systems of multiple equations.
Parts of an economic model
- an input that is fixed over time, except when the model builder changes it for an experiment.
- Exogenous variable
- an input that can change over time, but determined ahead of time by the model builder.
- exogenous = “outside of the model”
- Endogenous variable
- an outcome of the model—something that is explained by the model.
- endogenous = “within the model”