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Lecture1 presentation small ECONOMETRIC MODELLING: THE 'GENERAL TO SPECIFIC' PROCEDURE. (A)Some “facts of life”: Dynamics matter: adjustments are not instantaneous Want to include “relevant” and exclude “irrelevant” variables: but how do we choose? (B) Key themes Principle of parsimony Any model we wish to use must be statistically well-specified. (C) ECONOMIC THEORY Is about equilibrium relationships Y = X β β 1 2 + (1) (D) OUR OBJECTIVES 1. To establish whether the hypothesised economic relationship is supported by empirical evidence. 2. If such support is found: To obtain 'good' estimates of the unknown parameters β 1 and β 2 To be able to test hypotheses about the unknown parameters To use our estimated regression model for (i) forecasting (ii) policy analysis/simulation modelling. [E] THE REQUIREMENTS OF A GOOD ECONOMETRIC MODEL What are the fundamental requirements of an 'adequate' econometric model? (1) THE MODEL MUST BE DATA ADMISSIBLE . It must be logically possible for the data to have been generated by the model. (2) THE MODEL MUST BE CONSISTENT WITH SOME ECONOMIC THEORY . (3) REGRESSORS SHOULD BE (AT LEAST) WEAKLY EXOGENOUS WITH RESPECT TO THE PARAMETERS OF INTEREST. (4) THE MODEL SHOULD EXHIBIT PARAMETER CONSTANCY . (5) THE MODEL SHOULD BE DATA COHERENT . The residuals should be unpredictable from their past history. (6) THE MODEL SHOULD BE ABLE TO ENCOMPASS A RANGE OF ALTERNATIVE MODELS. (F) STATICS AND DYNAMICS: EQUILIBRIUM AND ADJUSTMENTS TO EQUILIBRIUM 1
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The regression model counterpart to (1) (assuming time-series data) Y = + X + u t = 1,. ..,T t t t β β 1 2 ( 2) This is a static econometric model. We need to take account of the possibility of dynamic adjustment processes.
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This note was uploaded on 03/01/2012 for the course EC 408 taught by Professor Rogerperman during the Fall '07 term at Uni. Strathclyde.

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Lecture1presentationsmall - Lecture1 presentation small...

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