How Did We Get to Where We Are Now? Reflections on 50 Years of Macroeconomic and Financial Econometrics

In: The Manchester School, Volume 83, Issue S2, p. 60-82

Abstract

This lecture is about how best to evaluate economic theories in macroeconomics and finance, and the lessons that can be learned from the past use and misuse of evidence. It is argued that all macro/finance models are 'false' so should not be judged solely on the realism of their assumptions The role of theory is to explain the data. Models should be judged by their ability to do this. Data‐mining will often improve the statistical properties of a model but does not improve economic understanding. These propositions are illustrated from the last 50 years of macro and financial econometrics.