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A Skeptical Note on the New Econometrics

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  • Alan S. Blinder

Abstract

One suggestion for coping with the Lucas critique of applied econometric research is to estimate the taste and technology parametersthat presumably underlie supply and demand curves. Proponents of this approach generally interpret economy-wide data on prices and quantities as the results of optimization problems solved by representative consumers and firms. Theoretical first-order conditions (normally linear)for interior solutions are then used to convert observed data intoestimates of the taste and technology parameters of representative agents.This brief paper points to a hazard in this type of research.Specifically, the new style of econometrics can lead to serious error if the economy-wide data are not in fact generated by interior optima of representative agents, but rather come from aggregating over agents that behave quite differently.In an example where the market-wide demand curve is smooth eventhough each individual's demand function is a step function, the procedures of the new econometrics are shown to lead to grievous errors even though all consumers optimize and the econometrician is assumed to know the precise form of the utility function. It is argued that this example is of quite general applicability, and that the simpler procedures of "old fashioned" econometrics may be less hazardous.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1092.

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Date of creation: Apr 1987
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Publication status: published as Blinder, Alan S. "A Skeptical Note on the New Econometrics," Prices, Competition and Equilibrium, eds. M.H. Peston and R.E. Quandt, London: Philip Allan, 1986, pp. 73-83.
Handle: RePEc:nbr:nberwo:1092

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  1. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  2. Novshek, William & Sonnenschein, Hugo, 1979. "Marginal Consumers and Neoclassical Demand Theory," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1368-76, December.
  3. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
  4. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
  5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  6. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
  7. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  8. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  9. Thomas J. Sargent, 1982. "Beyond demand and supply curves in macroeconomics," Staff Report 77, Federal Reserve Bank of Minneapolis.
  10. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  11. Rosen, Harvey S & Quandt, Richard E, 1978. "Estimation of a Disequilibrium Aggregate Labor Market," The Review of Economics and Statistics, MIT Press, vol. 60(3), pages 371-79, August.
  12. Olivier Jean Blanchard, 1980. "The Monetary Mechanism in the Light of Rational Expectations," NBER Chapters, in: Rational Expectations and Economic Policy, pages 75-116 National Bureau of Economic Research, Inc.
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