by From Asad Zaman Launched in early 20th Century by Ragnar Frisch, econometric methodology was strongly shaped by the Cowles Commission (CC) in the 1960’s. The CC approach relied on structural equations, which embodied causal information known in advanced to the researcher. The goal was estimation of causal effects, and not discovery or assessment of the hypothesized causal structures. The oil shock of the 1970’s led to dramatic failures of macroeconomic regression models, leading to general distrust of econometric methodology. Two major critiques emerged. The Sims critique argued that hypothesized causal structures were false, and should be abandoned. We should go back to a purely descriptive analysis, looking for patterns in the numbers, without any reference to the real world
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from Asad Zaman
Launched in early 20th Century by Ragnar Frisch, econometric methodology was strongly shaped by the Cowles Commission (CC) in the 1960’s. The CC approach relied on structural equations, which embodied causal information known in advanced to the researcher. The goal was estimation of causal effects, and not discovery or assessment of the hypothesized causal structures. The oil shock of the 1970’s led to dramatic failures of macroeconomic regression models, leading to general distrust of econometric methodology. Two major critiques emerged. The Sims critique argued that hypothesized causal structures were false, and should be abandoned. We should go back to a purely descriptive analysis, looking for patterns in the numbers, without any reference to the real world phenomena represented by these numbers. Directly opposite was the Lucas critique which said that regression models were based on surface relationships between the numbers and ignored the deeper causal structures which drive these relationships. Regression models would fail when economic regimes underwent structural change – precisely when they were most needed. Neither approach has led to successful macro models. Models based on both approaches, as well as more conventional macro models, failed dramatically in the Global financial crisis. The fundamental problem lies in the failure of econometrics to incorporate causal inference correctly.
Causal Explanation of Autonomy & Invariance of Regression Relationships