New Directions in Econometric Practice: General to Specific Modelling, Cointegration, and Vector Autoregression

By Wojciech W. Charemza; Derek F. Deadman | Go to book overview

Preface

This book has its origins in a series of undergraduate lectures entitled 'The theory and applications of economic modelling' given over several years by both authors at the University of Leicester. Our experience is that nowadays, when there are so many excellent econometric textbooks and computing packages available, diligent students do not normally encounter particular difficulties in absorbing the principles of econometric theory, or in carrying out the estimation of models. Combining these elements with relevant economic theory to produce a convincing piece of empirical econometric modelling is another matter. Whilst it seems natural and superficially appealing to students to run countless regressions and attempt to choose that which appears to be the 'best' model, this approach has been widely criticized as failing to provide credible results. Unfortunately, descriptions of alternative systematic (and methodologically superior) practices of deriving sound econometric models tend to be available only in abstract and difficult academic articles

In this book we have attempted to remedy this problem by explaining the basic concepts and computations of contemporary econometric methodologies at a level accessible to non-specialists. The methodologies described include general-to-specific modelling, cointegration and vector autoregressive (VAR) modelling. These are all relevant for time series rather than cross-section econometrics.

The book is intended to be suitable for final year undergraduates, economic practitioners and postgraduates who wish to apply modern econometric techniques as part of essentially non-econometric theses. More advanced readers will need to supplement this book by following up the further reading which is given in each chapter.

It is assumed that the reader has followed an introductory course in mathematical statistics and multiple regression analysis (including basic tests on the General Linear Model), and also has some knowledge of elementary macroeconomics. For Chapters 6 and 7, an understanding of linear simultaneous equation models would be useful, although a short introduction to this is given.

In order to illustrate the approaches to modelling discussed in this book, we have used a single example throughout. The model of Davidson, Hendry, Srba and Yeo of UK aggregate consumption expenditure, published in 1978, which was a major influence on recent developments in applied econometric analysis, is re-examined in the light of these new developments. Whilst it is possible to study particular chapters in isolation, since the basic example is that of the model above, it is advisable that the reader at least glances through Chapter 3 where this model is discussed.

-xiii-

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