A Practical Introduction to Econometric Methods: Classical and Modern

Synopsis

The text is aimed at final-year undergraduate students or those at the graduate level doing econometrics for the first time. It is an introductory course in the theory and practice of classical and modern econometric methods. A proper study of the material will allow the reader to understand the scope and limitations of classical and modern econometric techniques; read, write and properly interpret articles and reports of an applied econometric nature; and be in a position to build upon the elements of econometric theory and practice introduced in the book.

Although some basic knowledge of matrix algebra and elementary statistical theory will be assumed, much of it is covered in the text. All the main theoretical concepts are illustrated with the use of econometric software, mainly Eveiws.

Excerpt

Econometrics is about measurement in economics. It is not the only area of study in economics concerned with measurement but it is probably the best known. It has been used, directly and indirectly, to answer questions like: "What is the value of the marginal propensity to consume (mpc) of the residents of Tobago?" It can also be used to test hypotheses about the Tobago mpc: is it greater than 90%? Is it greater than the mpc of Trinidad? It can be used to forecast economic variables or to answer burning policy questions like: "How much does the government need to invest in order for unemployment to be reduced to 6.5%?" and so on. A study of econometrics promises a lot, but does it deliver the goods as promised?

Unfortunately, the use of econometrics is no guarantee that questions like those just asked will be answered satisfactorily. The first caution is that, if the tools of the trade are employed incorrectly, then the answers given to economic questions will reflect this basic inadequacy. Second, there are 101 problems associated less with the methods than with the economic data to which they are applied, so that great caution should always be used in interpreting the results obtained.

To a large extent, this book is concerned with these two problems: it is concerned first with introducing the student to econometric methods, with letting him or her know the great promise that they hold. At the same time, it is concerned with putting the student on guard against the many pitfalls that can (and often do) result from misapplication of these methods or from a misunderstanding of their inherent limitations.

CLASSICAL AND MODERN ECONOMETRICS

The term "econometrics" was coined in the 1930s when the Econometrics Society was founded. The society included such visionaries as Ragnar Frisch and Jan Tinbergen (both Nobel Laureates). At that time it was defined as almost anything requiring the application of mathematical and statistical methods to economic analysis. The fundamental tool was then, and remains even to today, regression analysis.

But even from the outset, the discipline had its detractors, not the least of whom was another visionary, John Maynard Keynes (1939). He, and others, pointed to the serious weaknesses in economic data that might (and indeed did) lead to tremendous abuse. It is possible to explain the entire history of the discipline as one of responding to concerns raised by such illustrious individuals, resulting in the elaboration of more . . .

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