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Laws and Limits of Econometrics

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Author Info
Peter C.B. Phillips () (Cowles Foundation, Yale University)

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Abstract

We start by discussing some general weaknesses and limitations of the econometric approach. A template from sociology is used to formulate six laws that characterize mainstream activities of econometrics and the scientific limits of those activities, we discuss some proximity theorems that quantify by means of explicit bounds how close we can get to the generating mechanism of the data and the optimal forecasts of next period observations using a finite number of observations. The magnitude of the bound depends on the characteristics of the model and the trajectory of the observed data. The results show that trends are more elusive to model than stationary processes in the sense that the proximity bounds are larger. By contrast, the bounds are of smaller order for models that are unidentified or nearly unidentified, so that lack or near lack of identification may not be as fatal to the use of a model in practice as some recent results on inference suggest, we look at one possible future of econometrics that involves the use of advanced econometric methods interactively by way of a web browser. With these methods users may access a suite of econometric methods and data sets online. They may also upload data to remote servers and by simple web browser selections initiate the implementation of advanced econometric software algorithms, returning the results online and by file and graphics downloads.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1397.

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Length: 32 pages
Date of creation: Feb 2003
Date of revision:
Publication status: Published in The Economic Journal (2003), 13(4&6): C26-C52
Handle: RePEc:cwl:cwldpp:1397

Note: CFP 1081.
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Activities and limitations of econometrics; automated modeling; nearly unidentified models; nonstationarity; online econometrics; policy analysis; prediction; quantitative bounds; trends; unit roots; weak instruments;

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Find related papers by JEL classification:
C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - General
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Peter C. B. Phillips, 1998. "New Tools for Understanding Spurious Regressions," Econometrica, Econometric Society, vol. 66(6), pages 1299-1326, November.
  2. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-54, November. [Downloadable!] (restricted)
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  3. Phillips, Peter C.B. & Moon, Hyungsik Roger & Xiao, Zhijie, 2001. "How To Estimate Autoregressive Roots Near Unity," Econometric Theory, Cambridge University Press, vol. 17(01), pages 29-69, February. [Downloadable!]
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  4. Park, Joon Y & Phillips, Peter C B, 2001. "Nonlinear Regressions with Integrated Time Series," Econometrica, Econometric Society, vol. 69(1), pages 117-61, January.
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  5. Forchini, Giovanni & Hillier, Grant, 2003. "Conditional Inference For Possibly Unidentified Structural Equations," Econometric Theory, Cambridge University Press, vol. 19(05), pages 707-743, October. [Downloadable!]
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  6. Dean Corbae & Sam Ouliaris & Peter C. B. Phillips, 2002. "Band Spectral Regression with Trending Data," Econometrica, Econometric Society, vol. 70(3), pages 1067-1109, May. [Downloadable!] (restricted)
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  7. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March. [Downloadable!] (restricted)
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  8. Peter C.B. Phillips, 1998. "Econometric Analysis of Fisher's Equation," Cowles Foundation Discussion Papers 1180, Cowles Foundation, Yale University. [Downloadable!]
  9. repec:cup:etheor:v:10:y:1994:i:3-4:p:764-73 is not listed on IDEAS
  10. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November. [Downloadable!] (restricted)
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  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  12. Sargan, J D, 1983. "Identification and Lack of Identification," Econometrica, Econometric Society, vol. 51(6), pages 1605-33, November. [Downloadable!] (restricted)
  13. Katsumi Shimotsu & Peter C.B. Phillips, 2002. "Exact Local Whittle Estimation of Fractional Integration," Economics Discussion Papers 535, University of Essex, Department of Economics. [Downloadable!]
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  14. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Phillips, Peter C. B., 2002. "New unit root asymptotics in the presence of deterministic trends," Journal of Econometrics, Elsevier, vol. 111(2), pages 323-353, December. [Downloadable!] (restricted)
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  16. Jushan Bai & Serena Ng, 2001. "A Panic Attack on Unit Roots and Cointegration," Economics Working Paper Archive 469, The Johns Hopkins University,Department of Economics.
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  17. Michael P. Clements & David F.Hendry, 2001. "Forecasting with difference-stationary and trend-stationary models," Econometrics Journal, Royal Economic Society, vol. 4(1), pages S1-S19.
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  18. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December. [Downloadable!] (restricted)
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  19. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November. [Downloadable!] (restricted)
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  20. Phillips, Peter C B & Xiao, Zhijie, 1998. " A Primer on Unit Root Testing," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 423-69, December. [Downloadable!] (restricted)
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  21. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July. [Downloadable!] (restricted)
  22. Phillips, Peter C B, 1996. "Econometric Model Determination," Econometrica, Econometric Society, vol. 64(4), pages 763-812, July. [Downloadable!] (restricted)
  23. Frank Kleibergen, 2000. "Pivotal Statistics for Testing Structural Parameters in Instrumental Variables Regression," Tinbergen Institute Discussion Papers 00-055/4, Tinbergen Institute. [Downloadable!]
  24. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October. [Downloadable!] (restricted)
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  25. Wolfgang Hardle & Oliver Linton, 1994. "Applied Nonparametric Methods," Cowles Foundation Discussion Papers 1069, Cowles Foundation, Yale University. [Downloadable!]
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  26. Park, Joon Y. & Phillips, Peter C.B., 1999. "Asymptotics For Nonlinear Transformations Of Integrated Time Series," Econometric Theory, Cambridge University Press, vol. 15(03), pages 269-298, June. [Downloadable!]
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  27. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  28. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  29. Phillips, Peter C. B., 1995. "Bayesian model selection and prediction with empirical applications," Journal of Econometrics, Elsevier, vol. 69(1), pages 289-331, September. [Downloadable!] (restricted)
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  30. Chao, John C. & Phillips, Peter C. B., 1999. "Model selection in partially nonstationary vector autoregressive processes with reduced rank structure," Journal of Econometrics, Elsevier, vol. 91(2), pages 227-271, August. [Downloadable!] (restricted)
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  31. Peter C.B. Phillips, 1992. "Bayes Methods for Trending Multiple Time Series with an Empirical Application to the US Economy," Cowles Foundation Discussion Papers 1025, Cowles Foundation, Yale University. [Downloadable!]
  32. Kim, Jae-Young, 1994. "Bayesian Asymptotic Theory in a Time Series Model with a Possible Nonstationary Process," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 764-773, August. [Downloadable!]
  33. Xiao, Zhijie & Phillips, Peter C. B., 2002. "Higher order approximations for Wald statistics in time series regressions with integrated processes," Journal of Econometrics, Elsevier, vol. 108(1), pages 157-198, May. [Downloadable!] (restricted)
  34. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07. [Downloadable!] (restricted)
  35. Peter C.B. Phillips, 1995. "Automated Forecasts of Asia-Pacific Economic Activity," Cowles Foundation Discussion Papers 1103, Cowles Foundation, Yale University. [Downloadable!]
  36. Phillips, Peter C B & Ploberger, Werner, 1996. "An Asymptotic Theory of Bayesian Inference for Time Series," Econometrica, Econometric Society, vol. 64(2), pages 381-412, March. [Downloadable!] (restricted)
  37. Peter C.B. Phillips & Werner Ploberger, 1999. "Empirical Limits for Time Series Econometric Models," Cowles Foundation Discussion Papers 1220, Cowles Foundation, Yale University. [Downloadable!]
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  38. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895.
  39. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
  40. David F. Hendry & Hans-Martin Krolzig, 1999. "Improving on 'Data mining reconsidered' by K.D. Hoover and S.J. Perez," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 202-219.
  41. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation, Yale University. [Downloadable!]
  42. Xiao, Zhijie & Phillips, Peter C. B., 1998. "Higher-order approximations for frequency domain time series regression," Journal of Econometrics, Elsevier, vol. 86(2), pages 297-336, June. [Downloadable!] (restricted)
  43. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
  44. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Peter C.B. Phillips, 2004. "Challenges of Trending Time Series Econometrics," Cowles Foundation Discussion Papers 1472, Cowles Foundation, Yale University. [Downloadable!]
  2. Peter C.B. Phillips, 2003. "Vision and Influence in Econometrics: John Denis Sargan," Cowles Foundation Discussion Papers 1393, Cowles Foundation, Yale University. [Downloadable!]
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  3. Simón Sosvilla-Rivero & Javier Alonso Meseguer, . "Estimación de una función de producción MRW para la Economía Española, 1910-1995," Studies on the Spanish Economy 197, FEDEA. [Downloadable!]
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  4. Razzak, Weshah, 2003. "A Perspective on Unit Root and Cointegration in Applied Macroeconomics," MPRA Paper 1970, University Library of Munich, Germany, revised 2007. [Downloadable!]
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  5. Shahidur Rahman, 2005. "An Alternative Estimation to Spurious Regression Model," Economic Growth centre Working Paper Series 0507, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
  6. Pesaran, M.H. & Timmermann, A., 2004. "‘Real Time Econometrics’," Cambridge Working Papers in Economics 0432, Faculty of Economics, University of Cambridge. [Downloadable!]
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  7. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2005. "Testing for Long Memory and Nonlinear Time Series: A Demand for Money Study," Trinity Economics Papers tep20021, Trinity College Dublin, Department of Economics. [Downloadable!]
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  8. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2007. "Demand for Money: A Study in Testing Time Series for Long Memory and Nonlinearity," The Economic and Social Review, Economic and Social Studies, vol. 38(1), pages 1-24. [Downloadable!]
  9. Peter C.B. Phillips, 2004. "Automated Discovery in Econometrics," Cowles Foundation Discussion Papers 1469, Cowles Foundation, Yale University. [Downloadable!]
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