An improved approach to empirical modelling
OxMetrics developer Prof. Sir David Hendry and Dr. Jennifer Castle discuss "An improved approach to empirical modelling" in this article in the CEPR's VOX online platform.
There are numerous possible approaches to building a model of a given data set. In economics, imposing a `theory model’ on the data by simply estimating its parameters is common. This column makes the case for a combined theory-driven and data-driven approach under which it is almost costless in statistical terms to check the relevance of large numbers of other candidate variables when the theory is complete, yet there is a good chance of discovering a better empirical model when the theory is incomplete or incorrect.
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