Bayesian Analysis - Applications to Danish Data

The principal distinction between classical inference and Bayesian inference lies in terms of the definitions of probability. The classical inference is based on the notion of 'objective' probability, i.e. probability with reference to repetitive phenomena or relative frequencies in repeated situations. On the other hand the Bayesian inference involves the notion of 'subjective' probability, i.e. individualistic assessment of 'rational' behaviour. Bayes' principle provides a convenient way of combining pre-sample (prior) information with observed sample information leading to post sample probabilities. The object of the paper is to illustrate the use of Bayes' principle in econometric modelling of an economy. Two different empirical examples are considered, and comparative advantages of Bayes' analysis in relation to classical approach are discussed.