DP10197 How did we get to where we are now? Reflections on 50 years of macroeconomic and financial econometrics

Author(s): Michael R. Wickens
Publication Date: October 2014
Keyword(s): asset price modelling, DSGE modelling, theory and evidence in economics, time series modelling
JEL(s): B1, C1, E1, G1
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10197

This lecture is about how best to evaluate economic theories in macroeconomics and finance, and the lessons that can be learned from the past use and misuse of evidence. It is argued that all macro/finance models are `false' so should not be judged solely on the realism of their assumptions. The role of theory is to explain the data, They should therefore be judged by their ability to do this. Data mining will often improve the statistical properties of a model but it does not improve economic understanding. These propositions are illustrated with examples from the last fifty years of macro and financial econometrics