When a governmental agency (e.g.,the US. Department of Commerce ) collects economic data, such as that Table I.1 does not necessarily have any economic theory in mind. How then does know that the data really support Keynesian theory of consumption ? It is because the Keynesian consumption function (i.e., the regression line ) shown in Figure I.3 is extremely close to the actual data points ? Is it possible that another consumption model (theory ) might equally fit the data as well ? For example. Milton Friedman has developed a model of consumption,called the permanent income hypothesis. 15 Robert Hall has also developed a model of consumption, called the life-cycle permanent income hypothesis.16 Could one or both of these model also fit the data in table I.1.?
In short, the question facing a researcher in practice is how choose among competing hypotheses or model of given phenomenon, such as the consumption -income relationship. As Miller contends :
No encounter with data is step towards genuine confirmation unless the hypotheses does a better job of coping whit the data than some natural rival....what strengthens a hypothesis , here , is a victory that is, at the same time , a defeat for a plausible rival .17
How then does one choose among competing model or hypotheses ? Here the advice given by Clive Granger is worth keeping in mind :18
I would like to suggest that in the future,when you are presented with a new piece of theory or empirical model, you ask the questions :
(i) What purpose does it have ? What economic decision does it help with ? and ;
(ii) Is there any evidence being presented that allow me to evaluate its quality compared to alternative or models ?
I think attention to such question will strengthen economic research an discussion
As progress through this book, we will come across several competing hypotheses trying to explain various economic phenomena. For Example , student of economics are familiar with concept of the production function ,which is basically a relationship between output and inputs ( say, capital and labor ). In the literature , two of the best know are the Cobb-Douglas and the constant elasticity of substitution production functions. Given the data on output and input s, we will have to find out which of the two production functions, if any, fits the data well.
The eight - step classical econometric methodology discussed above is neutral in the sense that it can be used to test any of the these rival hypotheses.
Is it possible to develop a methodology that is comprehensive enough to include competing hypotheses ? this is an involed and controversial topic.
_____________________________
15 Milton Friedman, A theory of Consumption Function , Princeton University Press. Princeton ,NJ.,1957.
16.R.Hall,"Stochastic Implications of the Life Cycle Permanent Income Hypothesis : Theory and Evidence," Journal of Political Economy,1978.vol.86,pp.971-987.
17R.W.Miller, Fact and method : Explanation, confirmation, and Reality in the Natural and Social Sciences, Princeton University Press ,Princeton ,N.J.,1978,p.176.
18.Clive W.J.Granger,Empirical Modeling in Economics, Cambridge University Press.UK.,1999,p.58
FIGURE I..5
We will discuss it in Chapter 13, after we have acquired the necessary econometric theory.
In short, the question facing a researcher in practice is how choose among competing hypotheses or model of given phenomenon, such as the consumption -income relationship. As Miller contends :
No encounter with data is step towards genuine confirmation unless the hypotheses does a better job of coping whit the data than some natural rival....what strengthens a hypothesis , here , is a victory that is, at the same time , a defeat for a plausible rival .17
How then does one choose among competing model or hypotheses ? Here the advice given by Clive Granger is worth keeping in mind :18
I would like to suggest that in the future,when you are presented with a new piece of theory or empirical model, you ask the questions :
(i) What purpose does it have ? What economic decision does it help with ? and ;
(ii) Is there any evidence being presented that allow me to evaluate its quality compared to alternative or models ?
I think attention to such question will strengthen economic research an discussion
As progress through this book, we will come across several competing hypotheses trying to explain various economic phenomena. For Example , student of economics are familiar with concept of the production function ,which is basically a relationship between output and inputs ( say, capital and labor ). In the literature , two of the best know are the Cobb-Douglas and the constant elasticity of substitution production functions. Given the data on output and input s, we will have to find out which of the two production functions, if any, fits the data well.
The eight - step classical econometric methodology discussed above is neutral in the sense that it can be used to test any of the these rival hypotheses.
Is it possible to develop a methodology that is comprehensive enough to include competing hypotheses ? this is an involed and controversial topic.
_____________________________
15 Milton Friedman, A theory of Consumption Function , Princeton University Press. Princeton ,NJ.,1957.
16.R.Hall,"Stochastic Implications of the Life Cycle Permanent Income Hypothesis : Theory and Evidence," Journal of Political Economy,1978.vol.86,pp.971-987.
17R.W.Miller, Fact and method : Explanation, confirmation, and Reality in the Natural and Social Sciences, Princeton University Press ,Princeton ,N.J.,1978,p.176.
18.Clive W.J.Granger,Empirical Modeling in Economics, Cambridge University Press.UK.,1999,p.58
We will discuss it in Chapter 13, after we have acquired the necessary econometric theory.
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