Econometrics and the Philosophy of Economics Econometrics and the Philosophy of Economics Theory-Data Confrontations in Economics Bernt P. Stigum PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD Copyright©2003byPrincetonUniversityPress PublishedbyPrincetonUniversityPress,41WilliamStreet,Princeton,NewJersey08540 IntheUnitedKingdom:PrincetonUniversityPress,3MarketPlace,Woodstock,Oxfordshire OX201SY AllRightsReserved LibraryofCongressControlNumber:2003106662 ISBN:0-691-11300-9 BritishLibraryCataloging-in-PublicationDataisavailable ThisbookhasbeencomposedinTimesRomanandAbadiExtraLightbyPrincetonEditorial Associates,Inc.,Scottsdale,Arizona Printedonacid-freepaper. www.pupress.princeton.edu PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 ToClive,ChristopheandGrayham,Dale,DavidandHans-Martin,Erik,Geir, Harald,Heather,Herman,JeffreyandDan,andToreandNils —forcollaborating ToHermanRugeJervell —foranunforeseenappendix ToDouglasV.DeJong,CathrineHagem,PerRichardJohansen,andHenry, Richard,andYngvild —formostwantedexamples ToAnna,Helena,MagnusWalker,andMarySofie —mygrandchildren ToErikandCarol,ToveandJonathan,andAnneOlaug,FiaandEarlSpencer —formakingmefeelaveryprivilegedperson Contents ListofFigures ix ListofTables xi Preface xv Chapter1 Introduction 1 PARTI. FACTSANDFICTIONINECONOMETRICS 31 Chapter2 TheConstructionofSocialReality 33 Chapter3 TheSocialConstructionofReality 52 Chapter4 FactsandFictioninEconometrics 71 PARTII. THEORIZINGINECONOMICS 93 Chapter5 TheoriesandModels 95 Chapter6 ThePurportofanEconomicTheory 117 Chapter7 RationalityinEconomics 143 Chapter8 TopologicalArtifactsandLifeinLargeEconomies 168 PARTIII. THEORY-DATACONFRONTATIONSINECONOMICS 191 Chapter9 RationalAnimalsandSamplePopulations 193 Chapter10 TheTheoryUniverse 216 Chapter11 TheDataUniverse 237 Chapter12 TheBridgePrinciples 262 PARTIV. DATAANALYSES 283 Chapter13 FrequentistAnaloguesofPriorsandPosteriors ToreSchwederandNilsLidHjort 285 Chapter14 OntheCOLSandCGMMMomentEstimation MethodsforFrontierProductionModels HaraldE.Goldstein 318 Chapter15 CongruenceandEncompassing ChristopheBontempsandGrayhamE.Mizon 354 Chapter16 NewDevelopmentsinAutomaticGeneral-to-Specific Modeling DavidF.HendryandHans-MartinKrolzig 379 PARTV. EMPIRICALRELEVANCE 421 Chapter17 Conjectures,Theories,andTheirEmpiricalRelevance 423 Chapter18 ProbabilityversusCapacityinChoiceunderUncertainty 458 viii CONTENTS Chapter19 EvaluationofTheoriesandModels CliveW.J.Granger 480 PARTVI. DIAGNOSTICSANDSCIENTIFICEXPLANATION 497 Chapter20 DiagnosesandDefaultsinArtificialIntelligence andEconomics 499 Appendix:Section20.3fromaLogicalPointofView byHermanRugeJervell 520 Chapter21 ExplanationsofanEmpiricalPuzzle:WhatCanBe LearnedfromaTestoftheRationalExpectationsHypothesis? HeatherM.Anderson 525 Chapter22 ScientificExplanationinEconomics 558 Chapter23 ScientificExplanationinEconometrics:ACaseStudy HeatherM.Anderson,BerntP.Stigum,andGeirOlveStorvik 578 PARTVII. CONTEMPORARYECONOMETRICANALYSES 611 Chapter24 HandlingtheMeasurementErrorProblembyMeans ofPanelData:MomentMethodsAppliedonFirmData ErikBiørn 613 Chapter25 OnBayesianStructuralInferenceinaSimultaneous EquationModel HermanK.vanDijk 642 Chapter26 AnEconometricAnalysisofResidentialElectric ApplianceHoldingsandConsumption JeffreyA.DubinandDanielL.McFadden 683 Chapter27 EconometricMethodsforAppliedGeneralEquilibrium Analysis DaleW.Jorgenson 702 Index 755 Figures 1.1 Atheory-dataconfrontation 3 1.2 Adisturbingriddle 4 3.1 Universalsandthereferenceofvariablesinthedata universe 56 5.1 Theaxiomaticmethod 100 5.2 Ahierarchyofconsumerchoicetheories 102 6.1 Alife-cycleinformationstructure 137 13.1 Confidencedistributionfortheratioψrepresentedas confidencedegree2[C(ψ)−1/2],basedon Norwegiandata 294 13.2 Trueconfidencedensityalongwithabc-estimatedversion ofit,forparameterψ=σ /σ withfourandninedegrees 2 1 offreedom 302 13.3 Threelog-likelihoodsconsistentwithauniformconfidence distributionover[0.4,0.8] 305 13.4 OnethousandbootstrapestimatesofP andµ 310 1848 13.5 Priorconfidencedensity,bootstrapdensity,andposterior confidencedensitiesforµ 312 14.1 PlotofR (t) 323 1 14.2 PlotofR (t) 323 2 ˆ 14.3 HistogramofV 340 1 ˆ 14.4 HistogramofV 340 2 ˆ 14.5 HistogramofV 343 3 16.1 Nullrejectionfrequencies 398 16.2 Power-sizetrade-off:t =2 399 16.3 Power-sizetrade-off:t =3 400 16.4 Selectingmisspecificationtests:QQplotsforT =100 413 21.1 Levelsdata 535 21.2 Differenceddata 536 21.3 Actualandforecastvaluesof∆R(1,t) 546 21.4 Actualandforecastvaluesof∆R(2,t) 547 23.1 Scatterplotsofeachpairofrandomtermscalculated fromtheestimatedmodelbytheKalmanfilter 601 23.2 Estimatedautocorrelationfunctionsforη ,η ,andΛ 602 1 2 23.3 Estimatedpartialautocorrelationfunctionsforη ,η , 1 2 andΛ 602
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