Econometric Modelling
Econometric Modelling is a process of modelling relationship that is believed to hold between various economic variables pertaining to a particular economic phenomena under study. Econometrics is therefore based upon the development of statistical methods for estimating economic relationships, testing economic theories, and evaluating and implementing government and business policy.
Typically, econometric models are fitted using ordinary least-squares regression or maximum-likelihood estimation methods, where the regression methods are being employed. The methods relate one or more exogenous variables to each endogenous variable.
According to Greene (2003) experience has shown that three viewpoints, that of statistics, economic theory, and mathematics, is a necessary, but not by itself a sufficient, condition for a real understanding of the quantitative relations in modern economic life. It is the unification of all three that is powerful. And it is this unification that constitutes econometrics and econometric modelling.
Stock and Watson (2011) state the most common application of econometrics is the forecasting of such important macroeconomic variables as interest rates, inflation rates, and gross domestic product. While forecast of economic indicators are highly visible and are often widely published, econometric methods can be used in economic areas that have nothing to do with macroeconomic forecasting, such as the effect of school spending on student performance, the effects of political campaign expenditures on voting outcomes, the reducing class size in improvement of elementary school education, the racial discrimination in the market for home loans, the effect of smoking reduction due to cigarette taxes, etc.
Related terms: Economic Theories, Macroeconomic Models, Forecasting, Econometrics
References:
Greene, W. H. (2003) Econometric Analysis. 5th Edition. New Jersey: Prentice Hall, 2003. ISBN 0-13-066189-9.
Stock, J. H., Watson, M. W. (2011) Introduction to Econometrics. 3rd Edition. New Jersey: Prentice Hall, 2011. ISBN 978-1408-26-4331.
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