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Time to reject the privileging of economic theory over empirical evidence? A Reply to Lawson (2009)

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  • Katarina Juselius

    (Department of Economics, University of Copenhagen)

Abstract

The present financial and economic crisis has revealed a systemic failure of academic economics and emphasized the need to re-think how to model economic phenomena. Lawson (2009) seems concerned that critics of standard models now will fill academic journals with contributions that make the same methodological mistakes, albeit in slightly different guise. In particular, he is rather sceptical to use of mathematical statistical models, such as the CVAR approach, as a way of learning about economic mechanisms. In this paper I discuss whether this is a relevant claim and argue that it is likely to be based on a misunderstanding of what a proper statistical analysis is and can offer. In particular, I argue that the strong evidence of (near) unit roots and (structural) breaks in economic variables suggests that standard economic models need to be modified or changed to incorporate these strong features of the data. Furthermore, I argue that a strong empirical methodology that allows data to speak freely about economic mechanisms, such as the CVAR, would ensure that important information in the data is not over heard when needed. Adequately applied such models would provide us with an early warnings system signalling that the economy is moving seriously out of equilibrium.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 09-16.

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Length: 13 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:kud:kuiedp:0916

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Related research

Keywords: economic crisis; Dahlem report; CVAR approach; Theory-first; Reality-first; Imperfect Knowledge Expectations; non-stationary data;

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  1. Colander, David C., 2009. "Economists, incentives, judgment, and the European CVAR approach to macroeconometrics," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(9), pages 1-21.
  2. Fanelli, Luca, 2007. "Evaluating the New Keynesian Phillips Curve under VAR-based learning," MPRA Paper 1616, University Library of Munich, Germany.
  3. Peter Ireland, 1999. "A Method for Taking Models to the Data," Computing in Economics and Finance 1999 1233, Society for Computational Economics.
  4. Spanos, Aris, 1995. "On theory testing in econometrics : Modeling with nonexperimental data," Journal of Econometrics, Elsevier, vol. 67(1), pages 189-226, May.
  5. Møller, Niels Framroze, 2008. "Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model," Economics Discussion Papers 2008-21, Kiel Institute for the World Economy.
  6. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
  7. Clements Michael P. & Hendry David F., 2008. "Economic Forecasting in a Changing World," Capitalism and Society, De Gruyter, vol. 3(2), pages 1-20, October.
  8. Axel Leijonhufvud, 2009. "Out of the corridor: Keynes and the crisis," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 741-757, July.
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  10. Nielsen, Bent, 2008. "On the Explosive Nature of Hyper-Inflation Data," Economics Discussion Papers 2008-9, Kiel Institute for the World Economy.
  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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