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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.

Suggested Citation

  • Katarina Juselius, 2009. "Time to reject the privileging of economic theory over empirical evidence? A Reply to Lawson (2009)," Discussion Papers 09-16, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0916
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2009/0916.pdf/
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    References listed on IDEAS

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    3. Møller, Niels Framroze, 2008. "Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-29.
    4. Nielsen, Bent, 2008. "On the Explosive Nature of Hyper-Inflation Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-29.
    5. 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 (IfW), vol. 3, pages 1-21.
    6. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1205-1226, March.
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    Cited by:

    1. Pinto, Hugo, 2011. "The role of econometrics in economic science: An essay about the monopolization of economic methodology by econometric methods," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(4), pages 436-443, August.

    More about this item

    Keywords

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

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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