Issues to discuss
• No consensus on good econometric practise
• Reality much more rich and complex than the theory
• The ceteris paribus in economic and econometric
modelling
The specific-to-general (VAR)
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ceteris paribus variables dumped into the error term
low ability to recject a theory model when inadeqate
Few (constant) parameters (by assumption)
No free parameters
Known expectations formation
The general-to-specific
• Combination of induction and deduction
• Weak link between theory model and reality
• Can adequately account for
unit root nonstationarity
structural breaks, such as shifts in equlibrium mean
and growth rates
A discussion of some basic principles for empirical
research using as an illustration Friedmans claim that
’Inflation is always and everywhere a monetary problem’
• Imbedding the theory model in a broader empirical
framwork: the pulling and pushing forces
• Formulating a set of empirically testable hypotheses
on different levels of generality
• Deductive inference: testing prior hypotheses
• Inductive inference: generating new hypotheses
• Reformulating the empirical problem/ the theoretical
problem, or both
Pulling and pushing forces
Imbedding Romer's money demand model
in the VAR
The pushing forces:
First level:
Second level:
The pulling forces
First level:
Because:
Second level:
The restrictions on β contain hypotheses on:
• money demand
• the Fisher parity
• the expectations hypothesis
The restrictions on α contain hypotheses on:
• pushing behavior (weak exogeneity)
• adjustment behavior (unit vectors in α)
The role of expectations
• for the specification of the long-run
relations
• for the short-run dynamics
The Fisher parity
The expectations hypothesis
To sum up:
Deductive inference
Inductive inference
Conclusions
• The deductive part is based on testable implications of a
theory model translated into a set of hypotheses in a
VAR
• The inductive part treats any discrepancies between
theory and the data as a useful piece of information,
allowing us to adjust our intuition of how the economic
and the empirical model work together: generates new
hypotheses
• Generates a set of ’sophisticated’ stylized facts
• The sensitivity of theory based conclusions to the ceteris
paribus assumption