Journal Article

Time to reject the privileging of economic theory over empirical evidence? A reply to Lawson

Katarina Juselius

in Cambridge Journal of Economics

Published on behalf of Cambridge Political Economy Society

Volume 35, issue 2, pages 423-436
Published in print March 2011 | ISSN: 0309-166X
Published online August 2010 | e-ISSN: 1464-3545 | DOI: https://dx.doi.org/10.1093/cje/beq024
Time to reject the privileging of economic theory over empirical evidence? A reply to Lawson

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  • General Aggregative Models
  • General Economics
  • Economic Methodology
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Macroeconomics and Monetary Economics
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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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The present financial and economic crisis has revealed a systemic failure of academic economics and emphasised the need to re-think how to model economic phenomena. Tony Lawson seems concerned that critics of standard models now will fill academic journals with contributions that make the same methodological mistakes, albeit in a slightly different guise. In particular, he is rather sceptical of the usefulness of mathematical statistical models, such as the Cointegrated VAR model, as a way of learning about economic mechanisms. In this paper I discuss whether this is a relevant claim and argue that it is likely to be based on a misunderstanding of what a proper statistical analysis is and can offer. In particular, I argue that the strong evidence of (near) unit roots and (structural) breaks in economic variables suggests that standard economic models need to be modified or changed to incorporate these strong features of the data. Furthermore, I argue that a strong empirical methodology that allows data to speak freely about economic mechanisms, such as the CVAR, would ensure that important signals in the data are not silenced by prior restrictions. Adequately applied such models would provide us with an early warning system signalling when the economy is moving seriously out of equilibrium.

Keywords: Economic crisis; Dahlem report; CVAR approach; Theory-first; Data-first; Imperfect knowledge expectations; Non-stationary data; A10; B40; C30; C50; E00; E10; E20; E60

Journal Article.  6903 words. 

Subjects: General Aggregative Models ; General Economics ; Economic Methodology ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Macroeconomics and Monetary Economics ; Multiple or Simultaneous Equation Models; Multiple Variables ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; Econometric Modelling

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