Abstract
The paper begins with a figurative representation of the contrast between present-day and formal applied econometrics. An explication of the status of bridge principles in applied econometrics follows. To illustrate the concepts used in the explication, the paper presents a simultaneous-equation model of the equilibrium configurations of a perfectly competitive commodity market. With artificially generated data I carry out two empirical analyses of such a market that contrast the prescriptions of formal econometrics in the tradition of Ragnar Frisch with the commands of present-day econometrics in the tradition of Trygve Haavelmo. At the end I demonstrate that the bridge principles I use in the formal-econometric analysis are valid in the Real World—that is in the world in which my data reside.
Highlights
Econometrics is a study of good and bad ways to measure economic relations
This paper is about the use of economic theory in such measurements, and about the need for bridge principles in applied econometrics
The present paper is based on ideas that I developed and presented in chapters 1, 2, 3, and 10 of my 2015 book, Econometrics in a Formal Science of Economics [1]
Summary
This paper is about the use of economic theory in such measurements, and about the need for bridge principles in applied econometrics.. 1)), Trygve Haavelmo professed the same idea: “Theoretical models are necessary tools in our attempts to understand and ‘explain’ events in real life. The present paper is based on ideas that I developed and presented in chapters 1, 2, 3, and 10 of my 2015 book, Econometrics in a Formal Science of Economics [1]. It gives a novel explication of the status of bridge principles in applied econometrics, and develops necessary and sufficient conditions that their use in an empirical analysis be valid.
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