Optimal simulation with econometric models

Abstract

The use of an econometric model for policy simulations is based on the analysis of the effects on some selected endogenous variables (objectives) due to shocks on some exogenous variables (instruments). In the commonly used simulation procedure these effects are examined by shocking the instruments one at a time. In this paper we suggest a criterion to combine the different shocks, on the basis of the concept of instruments effectiveness. It will be also shown how the resulting simulation procedure can be considered optimal from a certain point of view. A case study with an Italian econometric model is reported to somehow quantify the advantages of the suggested procedure with reference to the conventional one. © 1992.