Econometrics as a testing device

12 Feb, 2020 at 17:25 | Posted in Statistics & Econometrics | Comments Off on Econometrics as a testing device

Debating econometrics and its short-comings yours truly often gets the response from econometricians that “ok, maybe econometrics isn’t perfect, but you have to admit that it is a great technique for empirical testing of economic hypotheses.” I usually respond by referring to the text below …

testMost econometricians today … believe that the main objective of applied econometrics is the confrontation of economic theories with observable phenomena. This involves theory testing, for example testing monetarism or rational consumer behaviour. The econometrician’s task would be to find out whether a particular economic theory is true or not, using economic data and statistical tools. Nobody would say that this is easy. But is it possible? This question is discussed in Keuzenkamp and Magnus 􏰄1995􏰀. At the end of our paper we invited the readers to name a published paper that contains a test which, in their opinion, significantly changed the way economists think about some economic proposition. Such a paper, if it existed, would be an example of a successful theory test. The most convincing contribution, we promised, would be awarded with a one week visit to CentER for Economic Research, all expenses paid. What happened? One 􏰄Dutch􏰀 colleague called me up and asked whether he could participate without having to accept the prize. I replied that he could, but he did not participate. Nobody else responded. Such is the state of current econometrics.

Jan Magnus

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