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A History of EconometricsThe Reformation from the 1970s$
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Duo Qin

Print publication date: 2013

Print ISBN-13: 9780199679348

Published to Oxford Scholarship Online: September 2013

DOI: 10.1093/acprof:oso/9780199679348.001.0001

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Evolving Roles of Error Terms

Evolving Roles of Error Terms

(p.135) 8 Evolving Roles of Error Terms
A History of Econometrics

Qin Duo

Oxford University Press

This chapter describes the methodological confusions in econometrics via the growing labyrinth of the error term specification and interpretation. It traces the specification and interpretation from the pre-CC years and follows their evolution through the development of the three major reformative movements. It shows how various structural modelling strategies based on the CC tradition have tried to relegate the dynamics of time-series data to nuisance, atheoretical complications. In particular, it shows how the VAR approach gets somehow lost in of the dual interpretation of the error term as innovation error and structural shock. In contrast, the LSE approach seeks to decompose dynamic shocks into several components in an effort to keep the resulting error terms as atheoretical residuals free of statistical complications.

Keywords:   Residuals, disturbance, structural shocks, innovation errors, short-run shocks, error correction

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