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Regional DSGE

Purpose and Methodology

Understanding the regional economy does not require persuasive narratives or ad-hoc explanations.
It requires a structural framework.

Regional economies are analysed through a structural DSGE framework, built on internally consistent behavioural relationships and equilibrium conditions.

The framework is evaluated against three stringent criteria:

1. Existence and stability of equilibrium

The model must admit a well-defined equilibrium (unique or stable), ensuring that economic trade-offs are coherent and internally consistent.

2. Likelihood consistency and parameter plausibility

The implied data-generating process must not be statistically rejected by observed macroeconomic evidence. Estimated structural parameters are required to lie within economically meaningful and empirically plausible ranges. Bayesian estimation is used as a statistical device to assess likelihood consistency and parameter plausibility, rather than as a validation criterion.

3. Empirical credibility via indirect inference (II)

Model-generated dynamics are tested against observed data using indirect inference, ensuring that simulated behaviour reproduces key empirical features of the real economy.

Interpretation

The purpose of the framework is not prediction, but stress-testing mechanisms and identifying regions of fragility in policy design.

While the model may suggest that regional productivity gaps within the UK reflect structural features and initial endowments, this does not imply economic determinism.
Instead, the framework clarifies:

  • which types of structural reforms can meaningfully alter long-run outcomes, and
  • which policy interventions are unlikely to do so.