While evaluating research proposals at a recent PSSP meeting, I realized that the level of knowledge about current econometric methodology both among researcher AND among those who evaluate -- is ABYSMALLY low.
Now that I am VC PIDE, an adequate level of understanding of econometric methodology will automatically be expected from researchers. I would like to provide some training along these lines on a weekly basis.
The FIRST place to start is the Davidson-Hendry-Srba-Yeo (DHSY) paper on the estimation the consumption function in England. This is my dividing line -- if you understand this paper, you can call yourself an econometrician, otherwise not. This is BY NO MEANS the state of the art -- it was written forty years ago, in 1970's. BUT it does provide the minimal level of understanding required to do sensible econometrics. Unfortunately, I have rarely seen applied work which conforms to this minimal level of understanding.
I have created a website where I plan to do a detailed explanation of all the issues discussed in the paper. The truth is that the paper is highly compact -- a lot of deep ideas are condensed into a very brief text, so it requires a HASHIA -- explanations written on the margin. I and my students have finished the first section, which is available on the website DHSY
I would like to explain the Hendry methodology in the context of a critique of real paper which are submitted to our journals. I am attaching a few extracts from a recent submission which was rejected.
The paper explores the relation between Economic Growth (EG) and FDI. After doing the usual integration cointegration analysis, author finds that EG and FDI are both stationary, and they are also co-integrated, so have a long term relationshipl. Then he runs a Vector Error Correction model following the Engle-Granger two step procedure -- first step is to save the errors from the cointegration equation, the second step is to run current EG and FDI on lagged errors. The results are displayed in the extract from the paper, which is available from the links below. The SECOND (and final equation) estimated in the paper is a regression Log (EG) on Log (FDI ) and some other variables -- you are asked to PROVIDE a CRITIQUE of this SECOND equation on the basis of your understanding of the first section of DHSY
Please write your critique on THIS BLOG -- ALL are welcome to write there own critiques -- I will give a prize to the best critique -- I will also provide additional hints and information as we go along.
