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Econometrics-Alchemy or Science?
Abstract
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
... In the 1940s, Jacob Marschak assembled a team to remake Tinbergen's model (Klein, 1991;Bjerkholt, 2014), providing a constructive reaction to Keynes's critique that certainly did not consist of econometricians drowning their sorrows in arithmetic calculations. The project was highly ambitious, not merely because of the 1 For other accounts of this controversy see, for instance, Patinkin (1976), Stone (1978), Hendry (1980), Zellner (1982), Pesaran and Smith (1985), Carabelli (1988), Morgan (1990), Keuzenkamp (1995), Garrone and Marchionatti (2004), and Maas (2014). ...
... Four decades later, Hendry's (1980) three golden rules of econometrics, "test, test, and test," seem to echo Tinbergen's optimistic belief in econometrics. Prediction and "predictive accuracy," inHendry's (1980) account, provides a rather severe test for accepting econometric models, if only provisionally, since a prediction is presented in the form of a bold claim that is likely to be refuted(Lawson & Pesaran, 2009). While a model that would "merely accommodate" or fit the data, "is often considered to be ad hoc"(Lawson & Pesaran, 2009, p. 90), a model that yields a prediction is actually making a defined, sometimes courageous, and above all bold claim that can potentially be refuted and, hence, a claim that would be considered a good candidate for testing. ...
In 1944, just five years after the controversy between John Maynard Keynes and Jan Tinbergen, Lawrence R. Klein found himself in a unique position. As a leading expert on Keynesian economics in the United States, Klein was recruited at the Cowles Commission to rebuild Tinbergen’s macro-econometric model of the US economy. This paper explores Klein’s macro-econometric approach as a serious attempt to reconcile Tinbergen’s work with Keynes’s criticisms. For Klein, macro-econometric modeling was not merely a tool for generating insights about the economic world but also a practice that took seriously the inherent limitations of statistical and mathematical methods. Ultimately, it was this complex practice—rather than econometric techniques alone—that enabled macroeconomists to discover, understand, and articulate concrete observations about the economy.
... 14 See also an insightful discussion on "Financial Collapse" with Nassim N. Taleb the Econometric Society. 16 However, the transition was not smooth, with many economists (e.g., Leontief, 1971;Brown, 1972;Hendry, 1980) criticising the use or misuse of econometrics in the field of economics. From 1970, the use of empirical models in rigorous and prestigious scientific journals of economics (e.g., American Economic Review) began to grow rapidly (see Figlio, 1994), indicating that empiricism was gaining ground over theory (for some interesting discussions, see Backhouse and Cherrier, 2017). ...
Entrepreneurial approaches and privatisation practices have been widely embraced by academic and professional leadership teams in UK universities, arguably to ensure that the existing chasm between universities and society is bridged. Departments specialising in economics and business have transformed into mechanisms for disseminating knowledge reconfigured to meet the social and economic demands of the contemporary ‘entrepreneurial’ university. This paper, through a comprehensive review of the extant literature, argues that the entrepreneurial practices and performance-driven metrics adopted by UK universities have largely suppressed academic pluralism, theoretical development, and heterodox thinking. We are of the view that market practices, in conjunction with managerial-type approaches aimed at satisfying specific institutional and individual performance metrics, raise ethical concerns that undermine the established role of academia. The preservation of the university’s traditional role as an institution that promotes intellectual inquiry and pluralism, seeking factual and new knowledge by cultivating virtues and creativity, requires renunciation of the current model, which has transformed universities into ‘businesses’, and academics into ‘entrepreneurs’. Several alternative propositions are offered which, if considered, may help restore the sacrosanct role of the university as an institution of paideia.
... Such sentiments have been echoed numerous times in the causal inference literature (for e.g. Hendry, 1980;LaLonde, 1986). To ensure that our structural models are producing reasonable inferences, we should also be validating our models using out-of-sample data. ...
This paper is about the general disconnect that we see, both in practice and in literature, between the disciplines of travel demand modeling and causal inference. In this paper, we assert that travel demand modeling should be one of the many fields that focuses on the production of valid causal inferences, and we hypothesize about reasons for the current disconnect between the two bodies of research. Furthermore, we explore the potential benefits of uniting these two disciplines. We consider what travel demand modeling can gain from greater incorporation of techniques and perspectives from the causal inference literatures, and we briefly discuss what the causal inference literature might gain from the work of travel demand modelers. In this paper, we do not attempt to "solve" issues related to the drawing of causal inferences from travel demand models. Instead, we hope to spark a larger discussion both within and between the travel demand modeling and causal inference literatures. In particular, we hope to incite discussion about the necessity of drawing causal inferences in travel demand applications and the methods by which one might credibly do so.
... The prevailing literature on econometrics lays a strong emphasis on the procedural fairness and quality of a model's specification, such as the assumption of normality of model's error term, structural specification of the model, the choice of regressors, and measurement error. There is no doubt that diagnostic testing is now firmly established as a central topic in both econometric theory and practice (Hendry et al. 1980). DOLS by Stock and Watson (1993) has good robustness in the context of deviations from assumptions of standard regression, especially when it comes to residual correlation, heteroscedasticity, misspecification of functional form, and nonnormality of residuals. ...
In Pakistan, the majority of people have access to energy supplies. However, people who are underprivileged, below the extreme poverty line, or part of the middle class often spend disproportionate portions of their income on energy supplies and services, to some extent because of higher upfront prices for energy supplies, expensive products, and expensive imported appliances. The nonavailability of low-cost energy supplies is mainly affecting underdeveloped regions that have mostly low-income households. We used the dynamic ordinary least squares method to look at the impact of the energy crisis on income inequality from 1997 to 2021. The results show that the energy crisis exacerbates income inequality as low-income groups end up spending more significant shares of their income on energy products, supplies, and services than higher-income groups. Fair and equal access to energy supplies and services is less likely to reduce income inequality if prices are not cost-efficient. Cautious deliberation regarding the structure of energy tariffs is inevitable; at the same time, safety nets and social security programs for the poorest groups need to be expanded. At this stage, the aim is to target energy prices that will achieve the objectives of reducing polarity and increasing real income.
Teaching radical economics requires a pedagogical approach that challenges the existing status quo. Most critical pedagogy studies in economics teaching focus on political economy, economic principles, and macroeconomics. We argue that critical pedagogy praxis can also be implemented in quantitative methods education. This article reports the application of critical pedagogy in teaching econometrics, using a case study of a year 3 undergraduate module in the United Kingdom. Grounded in a problem-posing education philosophy, we discuss collaborative learning and democratic classroom practices. We use comparative data from before and after the implementation of critical pedagogy praxis, as well as students’ and educators’ perceptions. We find that critical pedagogy is likely to increase students’ grades, attendance, and engagement and could potentially foster action beyond the quantitative training.
JEL Classification: A22, B23, B59
Paper and cardboard packaging waste (PW) constitutes a significant component of municipal waste in the EU and is closely linked to issues of resource conservation and climate change. Recycling PW reduces the demand for virgin materials, thereby conserving natural resources and reducing greenhouse gas emissions associated with the extraction and production of virgin materials. Furthermore, PW recycling can impact the social and economic well-being of communities. This study investigates the confluence of income inequalities, digital consumption, materialism, and social protection, and their nexus with paper waste streams in a sample of 28 EU countries from the period of 2000 to 2020, using various statistical methods. Countries with higher levels of material consumption tend to have lower levels of PW recycling, while increased e-commerce activity and income concentration among a few individuals are robustly associated with decreased recycling performance. Conversely, social protection expenditures are positively correlated with PW recycling in both the short-and long-run.
We discuss the difficult question of measuring causality effects in empirical analyses, with applications to asymmetric information and risk management. It is now well documented in the economic literature that policy analysis must be causal. Hence, the measurement of its effects must also be causal. After presenting the main frameworks for causality analysis, including instrumental variables, difference-in-differences, and the generalized method of moments, we analyze the following questions: Does risk management affect firm value and risk? Do we face a moral hazard problem in insurance data? How can we separate moral hazard from adverse selection and asymmetric learning? Is liquidity creation a causal factor for reinsurance demand? We show that residual information problems are often present in different markets, while risk management may increase firm value when appropriate methodologies are applied. Finally, liquidity creation increases reinsurance demand.
The history of economic thought knows a few of heated methodological controversies (Methodenstreit), the most famous of which was a “battle” at the end of the 19th century between Austrian and New historical schools on proper methods of social sciences. Later at the turn of the 1930—1940s a dispute arose between J. M. Keynes, on the one hand, and Keynesians (J. Tinbergen, O. Lange, J. Marshak, etc.), on the other hand, who radically diverged in assessing prospects of a new subdiscipline — econometrics. In the literature, this episode is known as the “Keynes—Tinbergen debate”, since the discussion was centered on the study by J. Tinbergen “Statistical testing of business cycle theories” (1939), where one of the first large econometric models was offered, the parameters of which were estimated using the method of multiple correlation. Keynes sharply criticized Tinbergen’s approach (and more broadly, the whole econometrics). For a long time, Keynesians unequivocally recognized Keynes as the losing party, whom they accused of technical incompetence. However, the subsequent development of econometrics turned out to be largely focused precisely on the problems raised by Keynes.
Negli ultimi decenni, gli studi di economia applicata hanno sperimentato un cambiamento radicale nelle metodologie empiriche utilizzate, ora ampiamente riconosciuto come la "Rivoluzione della Credibilità". Questo cambiamento verso un'analisi empirica evidence-based ha avuto lo scopo di migliorare l'efficacia degli interventi e aumentare la fiducia del pubblico nel processo decisionale. Questo articolo discute le principali caratt ristiche del nuovo approccio empirico e passa in rassegna i principali studi nella letteratura economica che hanno affrontato una serie di questioni controverse, quali gli effetti economi- ci del salario minimo legale, l'impatto dell'immigrazione sul mercato del lavoro e il ruolo della contrattazione aziendale sulla performance. Sebbene il messaggio principale di questa revisione sia che i decisori politici e gli studiosi delle scienze sociali non possono ignorare l'approccio evidence-based per la valutazione delle politiche pubbliche, rimaniamo scettici riguardo al reale impatto che la nuova ondata di "studi della credibilità" ha avuto sul dibattito pubblico italiano. .
In this compelling 1995 book, David Hendry and Mary Morgan bring together the classic papers of the pioneer econometricians. Together, these papers form the foundations of econometric thought. They are essential reading for anyone seeking to understand the aims, method and methodology of econometrics and the development of this statistical approach in economics. However, because they are technically straightforward, the book is also accessible to students and non-specialists. An editorial commentary places the readings in their historical context and indicates the continuing relevance of these early, yet highly sophisticated, works for current econometric analysis. While this book provides a companion volume to Mary Morgan's acclaimed The History of Econometric Ideas, the editors' commentary both adds to that earlier volume and also provides a stand-alone and synthetic account of the development of econometrics.