Econometric alchemy

15 June, 2015 at 17:31 | Posted in Statistics & Econometrics | Leave a comment

Thus we have “econometric modelling”, that activity of matching an incorrect version of [the parameter matrix] to an inadequate representation of [the data generating process], using insufficient and inaccurate data.59524872 The resulting compromise can be awkward, or it can be a useful approximation which encompasses previous results, throws’ light on economic theory and is sufficiently constant for prediction, forecasting and perhaps even policy. Simply writing down an “economic theory”, manipulating it to a “condensed form” and “calibrating” the resulting parameters using a pseudo-sophisticated estimator based on poor data which the model does not adequately describe constitutes a recipe for disaster, not for simulating gold! Its only link with alchemy is self-deception.

David Hendry

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