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Econometric self-deception

Summary:
Thus we have “econometric modelling”, that activity of matching an incorrect version of [the parameter matrix] to an inadequate representation of [the data generating process], using insufficient and inaccurate data. The resulting compromise can be awkward, or it can be a useful approximation which encompasses previous results, throws’ light on economic theory and is sufficiently constant for prediction, forecasting and perhaps even policy. Simply writing down an “economic theory”, manipulating it to a “condensed form” and “calibrating” the resulting parameters using a pseudo-sophisticated estimator based on poor data which the model does not adequately describe constitutes a recipe for disaster, not for simulating gold! Its only link with alchemy is self-deception.

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Thus we have “econometric modelling”, that activity of matching an incorrect version of [the parameter matrix] to an inadequate representation of [the data generating process], using insufficient and inaccurate data.Econometric self-deception The resulting compromise can be awkward, or it can be a useful approximation which encompasses previous results, throws’ light on economic theory and is sufficiently constant for prediction, forecasting and perhaps even policy. Simply writing down an “economic theory”, manipulating it to a “condensed form” and “calibrating” the resulting parameters using a pseudo-sophisticated estimator based on poor data which the model does not adequately describe constitutes a recipe for disaster, not for simulating gold! Its only link with alchemy is self-deception.

David Hendry

Lars Pålsson Syll
Professor at Malmö University. Primary research interest - the philosophy, history and methodology of economics.

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