Econometric models are statistical models used in

econometrics Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...

. An econometric model specifies the statistical relationship that is believed to hold between the various economic quantities pertaining to a particular economic phenomenon. An econometric model can be derived from a deterministic

economic model In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desi ...

by allowing for uncertainty, or from an economic model which itself is stochastic. However, it is also possible to use econometric models that are not tied to any specific economic theory. A simple example of an econometric model is one that assumes that monthly spending by consumers is linearly

dependent A dependant is a person who relies on another as a primary source of income. A common-law spouse who is financially supported by their partner may also be included in this definition. In some jurisdictions, supporting a dependant may enabl ...

on consumers' income in the previous month. Then the model will consist of the equation :

C_t = a + bY_ + e_t,

where ''C''_''t'' is

consumer spending Consumer spending is the total money spent on final goods and services by individuals and households. There are two components of consumer spending: induced consumption (which is affected by the level of income) and autonomous consumption (which ...

in month ''t'', ''Y''_''t''-1 is income during the previous month, and ''e_t'' is an

error term In mathematics and statistics, an error term is an additive type of error. Common examples include: * errors and residuals in statistics, e.g. in linear regression * the error term in numerical integration In analysis, numerical integration ...

measuring the extent to which the model cannot fully explain consumption. Then one objective of the

econometrician Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...

is to obtain estimates of the

parameter A parameter (), generally, is any characteristic that can help in defining or classifying a particular system (meaning an event, project, object, situation, etc.). That is, a parameter is an element of a system that is useful, or critical, when ...

s ''a'' and ''b''; these estimated parameter values, when used in the model's equation, enable predictions for future values of consumption to be made contingent on the prior month's income.

Formal definition

, as in

statistics Statistics (from German language, German: ''wikt:Statistik#German, Statistik'', "description of a State (polity), state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of ...

in general, it is presupposed that the quantities being analyzed can be treated as

random variable A random variable (also called random quantity, aleatory variable, or stochastic variable) is a mathematical formalization of a quantity or object which depends on random events. It is a mapping or a function from possible outcomes (e.g., the po ...

s. An econometric model then is a

set Set, The Set, SET or SETS may refer to: Science, technology, and mathematics Mathematics *Set (mathematics), a collection of elements *Category of sets, the category whose objects and morphisms are sets and total functions, respectively Electro ...

of joint probability distributions to which the true joint probability distribution of the variables under study is supposed to belong. In the case in which the elements of this set can be indexed by a finite number of real-valued ''parameters'', the model is called a parametric model; otherwise it is a

nonparametric Nonparametric statistics is the branch of statistics that is not based solely on Statistical parameter, parametrized families of probability distributions (common examples of parameters are the mean and variance). Nonparametric statistics is based ...

semiparametric model In statistics, a semiparametric model is a statistical model that has parametric and nonparametric components. A statistical model is a parameterized family of distributions: \ indexed by a parameter \theta. * A parametric model is a model ...

. A large part of econometrics is the study of methods for selecting models,

estimating Estimation (or estimating) is the process of finding an estimate or approximation, which is a value that is usable for some purpose even if input data may be incomplete, uncertain, or unstable. The value is nonetheless usable because it is der ...

them, and carrying out

inference Inferences are steps in reasoning, moving from premises to logical consequences; etymologically, the word '' infer'' means to "carry forward". Inference is theoretically traditionally divided into deduction and induction, a distinction that in ...

on them. The most common econometric models are

structural A structure is an arrangement and organization of interrelated elements in a material object or system, or the object or system so organized. Material structures include man-made objects such as buildings and machines and natural objects such ...

, in that they convey causal and

counterfactual Counterfactual conditionals (also ''subjunctive'' or ''X-marked'') are conditional sentences which discuss what would have been true under different circumstances, e.g. "If Peter believed in ghosts, he would be afraid to be here." Counterfactual ...

information, and are used for policy evaluation. For example, an equation modeling consumption spending based on income could be used to see what consumption would be contingent on any of various hypothetical levels of income, only one of which (depending on the choice of a

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...

) will end up actually occurring.

Basic models

Some of the common econometric models are: * Linear regression * Generalized linear models *

Probit In probability theory and statistics, the probit function is the quantile function associated with the standard normal distribution. It has applications in data analysis and machine learning, in particular exploratory statistical graphics and s ...

Logit In statistics, the logit ( ) function is the quantile function associated with the standard logistic distribution. It has many uses in data analysis and machine learning, especially in data transformations. Mathematically, the logit is the ...

* Tobit *

ARIMA Arima, officially The Royal Chartered Borough of Arima is the easternmost and second largest in area of the three boroughs of Trinidad and Tobago. It is geographically adjacent to Sangre Grande and Arouca at the south central foothills of th ...

Vector Autoregression Vector autoregression (VAR) is a statistical model used to capture the relationship between multiple quantities as they change over time. VAR is a type of stochastic process model. VAR models generalize the single-variable (univariate) autoregres ...

Cointegration Cointegration is a statistical property of a collection of time series variables. First, all of the series must be integrated of order ''d'' (see Order of integration). Next, if a linear combination of this collection is integrated of order less ...

Hazard A hazard is a potential source of harm Harm is a moral and legal concept. Bernard Gert construes harm as any of the following: * pain * death * disability * mortality * loss of abil ity or freedom * loss of pleasure. Joel Feinberg giv ...

Use in policy-making

Comprehensive models of

macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

relationships are used by

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...

s and governments to evaluate and guide economic policy. One famous econometric model of this nature is the

Federal Reserve Bank A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve ...

econometric model.

References

External links

Manuscript of Bruce Hansen's book on Econometrics
* by

Mark Thoma Mark Allen Thoma (born December 15, 1956) is a macroeconomist and econometrician and a professor of economics at the Department of Economics of the University of Oregon. Thoma is best known as a regular columnist for ''The Fiscal Times'' throug ...

{{DEFAULTSORT:Econometric Model * Mathematical and quantitative methods (economics) pl:Model ekonometryczny

Formal definition

Basic models

Use in policy-making

See also

References

Further reading

External links