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Econometrics: Alchemy or Science?Essays in Econometric Methodology$
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David F. Hendry

Print publication date: 2000

Print ISBN-13: 9780198293545

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198293542.001.0001

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Econometric Modelling: The ‘Consumption Function’ In Retrospect

Econometric Modelling: The ‘Consumption Function’ In Retrospect

(p.419) 18 Econometric Modelling: The ‘Consumption Function’ In Retrospect
Econometrics: Alchemy or Science?

David F. Hendry (Contributor Webpage)

Oxford University Press

Exposits the main ideas and concepts for consumers’ expenditure behaviour in the UK to clarify their empirical content and implications. Each theoretical concept in the information taxonomy is related to the relevant empirical counterpart, reinterpreting some of the intuitive notions in DHSY, to show how the formalization clarifies problems with a ‘conventional’ econometric approach. The discovery/evaluation dichotomy, and the necessity but insufficiency of evaluation criteria to determine validity, are stressed. Modelling is an exercise in design to achieve predetermined selection criteria, but rigorous evaluation can eliminate poor designs. The theory of reduction explains the derivation of empirical models and their susceptibility to design, leading to an analysis of design and conventional criteria. The six information sets of the taxonomy and their associated criteria are related to well‐known test statistics (where each criterion is the null). The resulting tests are applied to the consumers’ expenditure model in DHSY on quarterly and annual data frequencies, and the inter‐war and post‐war UK data are compared, illustrating the progressive research strategy that follows from an encompassing approach to econometrics.

Keywords:   consumer expenditure, DHSY, encompassing, evaluation criteria, general‐to‐specific modelling, information taxonomy, model design, progressive research strategy, theory of reduction, UK

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