[Two stage least squares methods are used to estimate a postwar quarterly model of U.S. labor demand, supply, and wage adjustment. Analytical techniques are used to derive the long-run equilibrium properties of the estimated model. Short run properties are obtained by approximating the model in the form of two simultaneous difference equations. Simulation methods show the response of the model to an increase in the size of the armed forces.]

In this paper four alternative quarterly econometric models of investment behavior are fitted to a common set of data for individual manufacturing industries in the United States. Goodness of fit and absence of autocorrelation of errors are used as a basis for comparison of the performance of the alternative models. The econometric models are compared with each other and with alternative explanations of data on investment based on surveys of anticipated investment and on mechanical forecasting schemes. The four econometric models included in our study are those of Anderson [2], Eisner [15], Jorgenson and Stephenson [38], and Meyer and Glauber [46]. On the basis of our comparison, the ranking of the alternative models is as follows: (1) Jorgenson-Stephenson, (2) Eisner, (3) Meyer-Glauber, (4) Anderson. Anticipatory data give a better fit to data on investment expenditures than that provided by any of the econometric models. Mechanical forecasting schemes provide a fit that is superior to the Anderson and Meyer-Glauber models. These schemes are slightly inferior to the Eisner model and clearly inferior to the Jorgenson-Stephenson model. The alternative econometric models included in our comparison differ in specification of the time structure of the investment process and in the role ascribed to specific determinants of investment behavior. Both aspects of an econometric model affect its performance so that it is difficult to discriminate among alternative determinants of investment behavior on the basis of our results.

In this paper four alternative quarterly econometric models of investment behavior are compared with regard to predictive performance. Predictive performance may be assessed in two ways: (i) We compare prediction errors for a period of prediction with errors for a period of fit. (ii) We fit investment functions for both periods and test for structural change. These two procedures may be viewed as alternative tests of the hypothesis of structural change; the second is more powerful from the statistical point of view. Tests of predictive performance supplement the comparisons of alternative models given in our preceding paper [17]. Goodness of fit may be exaggerated by consideration of a wide range of alternatives and selection of the one that fits best. If goodness of fit is exaggerated, a predictive test should produce evidence of structural change between the period of fit and the period of prediction. Of course, the better an econometric model fits the data, the more stringent this criterion for predictive performance. The econometric models included in our study are those of Anderson [1], Eisner [7], Jorgenson and Stephenson [19], and Meyer and Glauber [21]. On the basis of predictive performance the ranking of the alternative models is as follows: (1) Eisner, (2) JorgensonStephenson, (3) Meyer-Glauber, and (4) Anderson. This ranking is similar to that resulting from comparisons based on goodness of fit presented in our preceding paper [17]. For econometric models of quarterly investment behavior, the models that fit the best also have the best predictive performance.