# Glossary

Contains definitions of terms used in eGovPoliNet partly based on DCMI Metadata Terms.

- 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. - Econometrics
- Econometrics is the application of mathematics, statistical methods, and, more recently, computer science, to economic data and is described as the branch of economics that aims to give empirical content to economic relations (M. Hashem Pesaran, 1987). More precisely, it is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference."(Samuelson et al., 1954)

Econometrics is the unification of economics, mathematics, and statistics. This unification produces more than the sum of its parts. Econometrics adds empirical content to economic theory allowing theories to be tested and used for forecasting and policy evaluation.

There are recent signs of progress. Work by [Chib (1995)], [Chib and Greenberg (1995)] and others on importing into econometrics Monte Carlo integration methods like importance sampling and Markov Chain Monte Carlo methods, which were applied successfully in other fields, (see Casella and George (1992) and Tierney (1994)), has made possible complete Bayesian analyses of models for which that would have been impossible a few years ago. This approach relaxes the constraint on model complexity somewhat, so that DSGE (Dynamic stochastic general equilibrium) models that tell appealing stories about behaviour can at the same time be complex enough to fit the data about as well as the best Bayesian reduced form VAR’s (Vector Auto-Regression models). Moreover, recent works on the relation of econometric modelling and model choice to policy analysis, for example Brock et al. (2003) and Leeper and Zha, (2001), suggest models for policy evaluation in uncertain economic environments.

Related terms: Dynamic Stochastic General Equilibrium Models, Econometric Modelling

References:

M. Hashem Pesaran (1987), "Econometrics," The New Palgrave: A Dictionary of Economics, v. 2, p. 8, pp. 8-22

P. A. Samuelson, T. C. Koopmans, and J. R. N. Stone (1954), "Report of the Evaluative Committee for Econometrica," Econometrica 22(2), p. 142., pp. 141-146

Chib, S., (1995), Marginal likelihood from the Gibbs output, Journal of the American Statistical Association, 90(432), p. 1313-1321

Chib, S. and E. Greenberg, (1995), Understanding the Metropolis-Hastings algorithm, The American Statistician, 49(4), p. 327-335

Casella, G. and E. George, (1992), Explaining the Gibbs sampler, The American Statistician, 46(3), p. 167-174

Tierney, L., (1994), Markov Chains for Exploring Posterior Distributions, Annals of Statistics, 22, p. 1701-1762

Brock, W.A., Durlauf, S.N. and K.D. West, (2003), Policy evaluation in uncertain economic environments, Brookings Papers on Economic Activity (1), p. 1-67

Leeper, E. and T. Zha, (2001), Models policy interventions. Technical report, Indiana University and Federal Reserve Bank of Atlanta - Economic Theories
- Economics is defined in various ways, but scarcity is always part of definition. The most general definition of economics is perhaps: "Economics is the discipline studying the organization of economic activities in society" (Witztum, 2011). According to Slavin (1989) economics is a set of tools that enables us to use our scarce resources efficiently. The end result is the highest possible standard of living. Theory is defined as a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained. Initial stage of any theory is the definition of the subject matters under investigation.

Economic theory is a broad concept for a well-substantiated explanation and understanding of commercial activities such as the production and consumption of goods.

The Wealth of Nations written by Adam Smith (Smith, 1776) is usually referred as the first classical economic concept or theory. Under this theory little government intervention is necessary to help support a society. Smith and his followers believed that when an individual pursues his self-interest, he indirectly promotes the good of society. In The Theory of Moral Sentiments, Smith alone wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it” (Smith, 1759). Therefore, self-interested competition in the free market would tend to benefit society as whole.

Mainstream economic theory relies upon a priori quantitative economic models.

References:

Slavin, S. L. (1989). Introduction to Economics. Irwin, Boston.

Smith, A. (1776). Nature and Causes of the Wealth of Nations (Wealth of Nations). Available on: http://www.econlib.org/library/Smith/smWN.html

Smith, A. (1759). The Theory of Moral Sentiment. Available on: http://www.econlib.org/library/Smith/smMS.html

Witztum, A. (2011). Introduction to economics. University of London.