Quantitative Features of Modern Economics Step 2:Development of economic theories/models Step 2:Development of economic theories/models Example 1:classical Keynesian theory-Keynes (1936) Multiplier of income with respect to government spending ∂Y 1 ∂G Γ1-6 Thus,the Keynesian theory can be effectively summarized by two mathematical equations. ADVANCED ECONOMETRICS Introduction to Econometrics May18,2021 16
ADVANCED ECONOMETRICS Introduction to Econometrics May 18, 2021 16 Step 2: Development of economic theories/models Example 1: classical Keynesian theory—Keynes（1936）: Multiplier of income with respect to government spending : Thus, the Keynesian theory can be effectively summarized by two mathematical equations. Quantitative Features of Modern Economics Step 2: Development of economic theories/models
Quantitative Features of Modern Economics Step 2:Development of economic theories/models Step 2:Development of economic theories/models Example 2:General equilibrium-Walras (1874): The general equilibrium analysis addresses whether there exists an equilibrium price vector p*such that all markets are clear simultaneously: Dt(P*)=S(P*)for all i∈{1，，n} where n is the number of goods; Di(P)is the demand for good i; Si(P)is the supply for good i; P=(P1,P2,...,Pn)is a price vector for n goods. ADVANCED ECONOMETRICS Introduction to Econometrics May18,2021 17
ADVANCED ECONOMETRICS Introduction to Econometrics May 18, 2021 17 Step 2: Development of economic theories/models Example 2: General equilibrium—Walras（1874）: The general equilibrium analysis addresses whether there exists an equilibrium price vector such that all markets are clear simultaneously: for all where is the number of goods; is the demand for good ; is the supply for good ; is a price vector for goods. Quantitative Features of Modern Economics Step 2: Development of economic theories/models
Quantitative Features of Modern Economics Step 3:Empirical verification of economic models Step 3:Empirical verification of economic models Economic Data Empirical theories Applications collections verification /models A key is to transform an economic model into a testable empirical econometric model. One often has to assume some functional form, up to some unknown model parameters. ADVANCED ECONOMETRICS Introduction to Econometrics May18,2021 18
ADVANCED ECONOMETRICS Introduction to Econometrics May 18, 2021 18 Step 3: Empirical verification of economic models Quantitative Features of Modern Economics Step 3: Empirical verification of economic models • A key is to transform an economic model into a testable empirical econometric model. • One often has to assume some functional form, up to some unknown model parameters. Data collections Economic theories /models Empirical verification Applications
Quantitative Features of Modern Economics Step 3:Empirical verification of economic models Step 3:Empirical verification of economic models One needs to estimate unknown model parameters and make inferences based on observed data,and check whether the econometric model is "adequate". An adequate model should be at least consistent with the empirical stylized facts,particularly with the empirical stylized facts. Questions: What is the consequence of model misspecification? What is model risk? ADVANCED ECONOMETRICS Introduction to Econometrics May18,2021 19
ADVANCED ECONOMETRICS Introduction to Econometrics May 18, 2021 19 Step 3: Empirical verification of economic models Quantitative Features of Modern Economics Step 3: Empirical verification of economic models • One needs to estimate unknown model parameters and make inferences based on observed data, and check whether the econometric model is “adequate”. • An adequate model should be at least consistent with the empirical stylized facts, particularly with the empirical stylized facts. Questions: What is the consequence of model misspecification? What is model risk?
Quantitative Features of Modern Economics Step 4:Applications Step 4:Applications Economic Data Empirical theories Applications collections verification /models After an econometric model passes the empirical evaluation, it can be used to: Test economic theory or hypotheses Forecast future evolution of the economy Conduct policy evaluation Make policy recommendation ADVANCED ECONOMETRICS Introduction to Econometrics May18,2021 20
ADVANCED ECONOMETRICS Introduction to Econometrics May 18, 2021 20 Step 4: Applications After an econometric model passes the empirical evaluation, it can be used to: Quantitative Features of Modern Economics Step 4: Applications Test economic theory or hypotheses Forecast future evolution of the economy Conduct policy evaluation Make policy recommendation Data collections Economic theories /models Empirical verification Applications