Summary

Abstract

Frisch states that business cycles can be generated in stable linear dynamic economic models only through the influence of stochastic shocks on the model solution. This hypothesis serves as a basis for analyzing econometric models in this study. The influences of stochastic elements on the dynamic properties of econometric models are treated in a systematic manner — in contrast to many other applications of econometric models for policy questions. The original hypothesis is enlarged in several directions: The residuals follow linear stationary stochastic processes. It is no longer assumed that exogenous variables are fixed, but their deviations from trend are modeled by linear stationary stochastic processes. Approaches are discussed which abandon the stability assumption and allow stochastic variations in the estimated regression coefficients of econometric models.