Econometrics – Alchemy or Science?

David F. Hendry

in Econometrics: Alchemy or Science?

Published in print October 2000 | ISBN: 9780198293545
Published online November 2003 | e-ISBN: 9780191596391 | DOI:
 Econometrics – Alchemy or Science?

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The key message is that econometrics is potentially scientific precisely because alchemy is creatable, detectable, and refutable. Since the validity of a model is an intrinsic property in relation to the evidence, it cannot be affected by how that model is selected; the three golden rules of econometrics are ‘test, test, and test’. However, the selection method is not thereby irrelevant: some methods are inherently flawed. The ‘alchemy’ here explains the behaviour of UK inflation ‘better’ by rainfall than by the stock of money. Later analyses reveal the hidden flaws thus resolved, when empirical regressions are meaningful.

Keywords: alchemy; econometric tests; inflation; model selection; nonsense regressions; science; validity

Chapter.  7760 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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