Behavioral consistency tests of econometric models

Most econometric models have many versions which differ from one another by 1) minor variations in the specification, or 2) choice of parameter estimator. This paper demonstrates how control theory can be employed to discriminate between alternative versions of an econometric model. For many policy problems involving a simple objective function and a single control variable, the investigator can hypothesize from the tenets of a given economic theory qualitative characteristics of the optimal economic behavior. By computing the optimal economic policy, the investigator can determine which versions are consistent with the hypothesis. This procedure was employed to determine which versions of a revised form of the Klein-Goldberger model are consistent with three hypotheses derived from economic theory. For the first two hypotheses, the results indicate that consistency depends on the choice of parameter estimates. For the third hypothesis, an inflation test at full employment, the results indicate that all versions are inconsistent with the hypothesis.