Temporal Aggregation and Structural Inference in Macroeconomics

This paper examines the quantitative importance of temporal aggregation bias in distorting parameter estimates and hypothesis tests. Our strategy is to consider two empirical examples in which temporal aggregation bias has the potential to account for results which are widely viewed as being anomalous from the perspective of particular economic models. Our first example investigates the possibility that temporal aggregation bias can lead to spurious Granger causality relationships. The quantitative importance of this possibility is examined in the context of Granger causal relations between the growth rates of money and various measures of aggregate output. Our second example investigates the possibility that temporal aggregation bias can account for the slow speeds of adjustment typically obtained with stock adjustment models. The quantitative importance of this possibility is examined in the context of a particular class of continuous and discrete time equilibriurn models of inventories and sales. The different models are compared on the basis of the behavioral implications of the estimated values of the structural parameters which we obtain and their overall statistical performance. The empirical results from both examples provide support for the view that temporal aggregation bias can be quantitatively important in the sense of Significantly distorting inference.