The Art and Science of Econometrics

Ping Zong

• Publisher: Routledge
• Year: 2022
• Print ISBN: 9781032227269
• eBook ISBN: 9781000580242
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Today econometrics has been widely applied in the empirical study of economics. As an empirical science, econometrics uses rigorous mathematical and statistical methods for economic problems. Understanding the methodologies of both econometrics and statistics is a crucial departure for econometrics. The primary focus of this book is to provide an understanding of statistical properties behind econometric methods.

Following the introduction in Chapter 1, Chapter 2 provides the methodological review of both econometrics and statistics in different periods since the 1930s. Chapters 3 and 4 explain the underlying theoretical methodologies for estimated equations in the simple regression and multiple regression models and discuss the debates about p-values in particular. This part of the book offers the reader a richer understanding of the methods of statistics behind the methodology of econometrics. Chapters 5–9 of the book are focused on the discussion of regression models using time series data, traditional causal econometric models, and the latest statistical techniques. By concentrating on dynamic structural linear models like state-space models and the Bayesian approach, the book alludes to the fact that this methodological study is not only a science but also an art.

This work serves as a handy reference book for anyone interested in econometrics, particularly in relevance to students and academic and business researchers in all quantitative analysis fields.

7Dynamic Econometric Models

DOI: 10.4324/​9781003273905-7

7.1 Introduction

The economic theory has some ability to identify long-run relationships between economic variables by equilibrium forces. However, the dynamic specifications in the traditional causal econometric models were not flexible enough to allow them adequately represent structural changes. When it was observed, it was already more frequently out of equilibrium than it is in equilibrium because it often needs to go through a transition stage. The economic theory sometimes is of little help regarding the specification of time lag and dynamic adjustments in the econometric model due to a paucity of dynamic theory.

This chapter is organised as follows. Following the introduction in Section 7.1, the simultaneous equation model is briefly discussed in Section 7.2; then Error Correction Models and Structural Econometric Time Series Approach are discussed in Sections 7.3 and 7.4, respectively; the main focus of this chapter is on dynamic linear models – State Space models. The general state space frameworks are discussed in Section 7.5; the Univariate State Space models are discussed in Section 7.6; the time-varying and time-invariant models are discussed in Section 7.7, and the Multivariate State Space models are discussed in Section 7.8; finally, summary and conclusions are presented in Section 7.9.

7.2 Simultaneous equation models

Econometric models often assume that an economic system can be described, not by a single equation, but by a set of simultaneous equation models (SEM).¹ This forms a single structural system of equations that express the relationships among the variables.

7.2.1 General ideas of SEM

SEMs are represented by a multiple-equation time series model which is based on taking the representation of a single approach and rendering it into a set of equations. Using a single theory to specify the relationships among several variables leads to choices about whi...

Table of contents

• Cover Page
• Half-Title Page
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Content
• List of figures
• Preface
• Introduction
• Methodology Review
• Methodology of Simple Regression Analysis
• Methodology of Multiple Regression Analysis
• Time Series Regression Analysis
• Methodologies of Economic Forecasting
• Dynamic Econometric Models
• The Bayesian Approach
• Résumé
• Bibliography
• Index