Aggregation in macroeconomic models: an empirical input-output approach

The aggregation level of industries in the Danish macroeconomic model ADAM is examined using a new indicator of aggregation bias. The indicator is dec omposed into contributions from the original industries, thereby clearly id entifying the aggregation problems which caused the six industry groups of the older versions of ADAM to be disaggregated into the current 19 groups. An aggregation key minimizing the new bias indicator is found: from the mic rolevel of 64 industries, 18 'optimal' industry groups are formed through ' clustering'; these groups are very similar to the current ADAM groups. Alto gether, the conclusions based on the new indicator closely resemble those r eached through years of practical experience. (C) 2000 Elsevier Science B.V . All rights reserved. JEL classification: D57.