Econometric model

Econometric models are statistical models used in econometrics. An econometric model specifies the statistical relationship that is believed to hold between the various economic quantities pertaining to a particular economic phenomenon. An econometric model can be derived from a deterministic economic model by allowing for uncertainty, or from an economic model which itself is stochastic. However, it is also possible to use econometric models that are not tied to any specific economic theory.^[1]

A simple example of an econometric model is one that assumes that monthly spending by consumers is linearly dependent on consumers' income in the previous month. Then the model will consist of the equation

${\displaystyle C_{t}=a+bY_{t-1}+e_{t},}$

where C_t is consumer spending in month t, Y_t-1 is income during the previous month, and e_t is an error term measuring the extent to which the model cannot fully explain consumption. Then one objective of the econometrician is to obtain estimates of the parameters a and b; these estimated parameter values, when used in the model's equation, enable predictions for future values of consumption to be made contingent on the prior month's income.