-15-
Incorporation of these notions and an awareness of the seasonality
inherent in the production side of the model led to the specification
adopted. The four equation system is structurally recursive and the
parameter matrix is triangular. The matrix of covariances between
structural equations was assumed to be diagonal -- an assumption not
particularly contradicted by the data given that the largest correlation
between structural disturbance vectors was only .277 with 28 observations.
Thus, the model is assumed to meet the theoretical conditions for a
recursive system so that ordinary least squares may be applied to the
estimation of the structure (Goldberger).
The model initially is estimated over the period 1971-I through
1977-IV. A longer period could have been chosen but it is likely that
this would not benefit forecasting accuracy in view of the probable
structural changes likely over even this short period. The structural
specification and estimated constant parameters are presented in Table
1 and corresponding variable definitions may be found in the Appendix.
Table 2 presents the derived reduced form and its estimated standard
errors as well as similar estimates for the unrestricted reduced form.
The Varying Parameter Recursive Model and Forecast Performance
The parameter evolution structures adopted are presented in Table
1. The choice of coefficients was conditioned by the rationale that
producer response to lagged prices may be subject to substantial vari-
ability over time.3 Thus, the non-fed cattle slaughter and pork pro-
duction equations admit a plus or minus 8 unit and 1.4 unit change in