Project CEMAPRE internal
Title | Bayesian Validation of Behavioural Parameters in Economic Models |
Participants | Rui Paulo (Principal Investigator), João F.D. Rodrigues |
Summary | Models for assessing the impact of economic policies often require the specification of two types of parameters: structural parameters, which can be calibrated using data from a baseline year, and behavioural parameters, which require econometric estimation and/or assumptions which are not amenable to direct testing. In this paper we address the problem of validating behavioural parameters given a set of empirical observations that can be compared with the model predictions. Our starting point is Bayesian model selection, which allows for assessing the change in a practitioner's belief in different models given observations. We depart from the classical formulae because a behavioural parameter is defined within a model and the practitioner has different models at his/her disposal. We therefore introduce an explicit probability that an empirical observation falls within the scope of a particular model. The Bayesian validation method developed here is applied to the selection of technology assumptions in supply-use models, which disambiguate how an industry uses a given input in the production recipe of multiple outputs, using the WIOD database as a case study. |