Methodology of econometrics

The methodology of econometrics is the study of the range of differing approaches to undertaking econometric analysis.[1]

The econometric approaches can be broadly classified into nonstructural and structural. The nonstructural models are based primarily on statistics (although not necessarily on formal statistical models), their reliance on economics is limited (usually the economic models are used only to distinguish the inputs (observable "explanatory" or "exogenous" variables, sometimes designated as x) and outputs (observable "endogenous" variables, y). Nonstructural methods have a long history (cf. Ernst Engel, 1857[2]).[3] Structural models use mathematical equations developed by economists and thus the statistical analysis can estimate also unobservable variables (for example, elasticity of demand[4]) and use unknown, but constant, parameters .[3] Structural models allow to perform calculations for the situations that are not covered in the data being analyzed, so called counterfactual analysis (for example, the analysis of a monopolistic market to accommodate a hypothetical case of the second entrant).[4]

  1. ^ Jennifer Castle and Neil Shephard (Eds) (2009) The Methodology and Practice of Econometrics - A Festschrift in Honour of David F. Hendry ISBN 978-0-19-923719-7.
  2. ^ Engel, Ernst (1857). "Die Productions-und Consumptionsverhältnisse des Königreichs Sächsen". Zeitschrift des Statischen Bureaus des Königlich Söchsischen Ministeriums des Inneren (in German) (8, 9).
  3. ^ a b Reiss & Wolak 2007, p. 4282.
  4. ^ a b Reiss & Wolak 2007, p. 4288.