Econometric Models
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Econometric models are
statistical model A statistical model is a mathematical model that embodies a set of statistical assumptions concerning the generation of Sample (statistics), sample data (and similar data from a larger Statistical population, population). A statistical model repres ...
s used in econometrics. An econometric model specifies the
statistical Statistics (from German: ''Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industria ...
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 Determinism is a philosophical view, where all events are determined completely by previously existing causes. Deterministic theories throughout the history of philosophy have developed from diverse and sometimes overlapping motives and consi ...
economic model by allowing for uncertainty, or from an economic model which itself is
stochastic Stochastic (, ) refers to the property of being well described by a random probability distribution. Although stochasticity and randomness are distinct in that the former refers to a modeling approach and the latter refers to phenomena themselv ...
. 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 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 in month ''t'', ''Y''''t''-1 is income during the previous month, and ''et'' is an error term measuring the extent to which the model cannot fully explain consumption. Then one objective of the econometrician is to obtain estimates of the parameters ''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

In econometrics, 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 of
joint probability distribution Given two random variables that are defined on the same probability space, the joint probability distribution is the corresponding probability distribution on all possible pairs of outputs. The joint distribution can just as well be considered ...
s 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
index Index (or its plural form indices) may refer to: Arts, entertainment, and media Fictional entities * Index (''A Certain Magical Index''), a character in the light novel series ''A Certain Magical Index'' * The Index, an item on a Halo megastru ...
ed by a finite number of real-valued ''parameters'', the model is called a
parametric model In statistics, a parametric model or parametric family or finite-dimensional model is a particular class of statistical models. Specifically, a parametric model is a family of probability distributions that has a finite number of parameters. Def ...
; otherwise it is a nonparametric or semiparametric model. A large part of econometrics is the study of methods for selecting models, estimating 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, in that they convey causal and 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) will end up actually occurring.


Basic models

Some of the common econometric models are: *
Linear regression In statistics, linear regression is a linear approach for modelling the relationship between a scalar response and one or more explanatory variables (also known as dependent and independent variables). The case of one explanatory variable is call ...
*
Generalized linear model In statistics, a generalized linear model (GLM) is a flexible generalization of ordinary linear regression. The GLM generalizes linear regression by allowing the linear model to be related to the response variable via a ''link function'' and b ...
s * Probit * Logit * Tobit * ARIMA * Vector Autoregression * Cointegration *
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 relationships are used by central banks and governments to evaluate and guide economic policy. One famous econometric model of this nature is the Federal Reserve Bank econometric model.


See also

* Benefit financing model


References


Further reading

* * * * *


External links


Manuscript of Bruce Hansen's book on Econometrics
* by Mark Thoma {{DEFAULTSORT:Econometric Model * Mathematical and quantitative methods (economics) pl:Model ekonometryczny