Econometrics
Econometrics is the branch of economics that uses statistical and mathematical methods to estimate economic relationships, test economic theories, and forecast future economic variables from empirical data. It combines economic theory, statistics, and mathematics to quantify the relationships suggested by theory.[1]
Purpose
Econometrics seeks to bridge the gap between theoretical economics and observed data. Its main tasks include:
- Estimation — quantifying the parameters of economic relationships, such as the effect of price on quantity demanded.
- Hypothesis testing — assessing whether theoretical propositions are consistent with data.
- Forecasting — predicting future values of economic variables such as gross domestic product or inflation.
- Policy evaluation — estimating the causal effects of policy interventions.
Methods
Econometric analysis proceeds through a general workflow: specifying a model derived from economic theory, collecting data, estimating the model's parameters, testing its assumptions, and interpreting the results. Common techniques include:
| Method | Description |
|---|---|
| Ordinary least squares (OLS) | A method for estimating the linear relationship between variables. |
| Multiple regression | Estimating the relationship between one dependent and several independent variables. |
| Time-series analysis | Studying data ordered over time, including trends and seasonality. |
| Panel data analysis | Analysing data combining cross-sectional and time-series dimensions. |
| Instrumental variables | Addressing endogeneity in causal estimation. |
Applications
Econometrics is applied throughout economics, including in macroeconomics, microeconomics, finance, labour economics, and development economics. It is also used extensively by central banks, governments, and international organisations to support policy-making.[1]