Lessons in Econometric Methodology: The Axiom of Correct Specification

Year 2017, Volume: 9 Issue: 2, 50 - 68, 04.10.2017

Asad Zaman

https://doi.org/10.33818/ier.337657

Cited By: 1

Abstract

Leamer first pointed
out that a regression model is valid only if all of the assumptions under which
it is constructed are valid. In particular, this means that all of relevant
regressors which are determinants must be included. In practice, applied
econometricians assume that whatever model they put is valid, when there can
only be one valid model. If any relevant regressor is omitted, then the
equation is mis-specified and conclusions drawn from the regression can be
seriously misleading. Even though this mis-specification analysis is included
in textbooks, it is routinely ignored in applications, where researcher
interpret their equations as if they have correctly specified all regressors,
without testing to see if this may be the cases. Hendry’s encompassing
methodology provides a remedy for this problem, but seems to be unfamiliar to
many. The purpose of this pedagogical note is to provide an introduction to an
elementary but important aspect of this methodology

Keywords

Econometric Methodology, Regression Model, Specification, Missing Variable, Model Specification

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