Econometrics is a major field in contemporary mainstream/[[Empiricism|empirical]] economic research. It involves the use of statistical tools to analyze numerical data, estimate relationships between economic variables, and predict unobserved values of the given data based on the parameters estimated in the regression analysis.

==Overview==
The most basic, fundamental starting point of econometrics is linear regression by [http://en.wikipedia.org/wiki/Ordinary_least_squares Ordinary Least Squares] (OLS), in which econometricians estimate the slope(s) of a given linear mathematical function (called “regression analysis”) comprised of economic variables (both dependent and independent), represented by observed data points. OLS is a tool for finding the “line of best fit” through a plotted data set, in which each entry in the given X data is paired with an entry in the Y data, i.e., the two are “observed” together.

The linear regressions require at least one dependent variable (or “outcome variable” or “left-hand-side (LHS) variable”), at least one explanatory variable (or “independent variable” or “right-hand-side (RHS) variable”), an intercept term, and an error term. These components are combined to make one equation showing y (dependent variable) as a function of x (explanatory variable):

Y = α + βX + ε

where α is the intercept, β is the slope, and ε is the error term (disturbance).

[[File:Olsbasics.jpeg|550px]]

The model can be expanded to include multiple explanatory variables, interaction terms (i.e., covarying explanatory variables explain the outcome variable), multiple dependent variables (panel models), time-series regression (observations over time, autoregressive (AR), moving average (MA), both (ARMA), vector autoregression (VAR), etc.), dummy variables (for variables with only two values, like yes/no, male/female, etc.), and many other considerations. There are numerous estimation processes designed to deal with specific problems in the data (assumption violations) or to more correctly identify relationships between variables under different circumstances than those fitting for OLS.
===Least Squares===
Ordinary Least Squares, as implied by the name, seeks to minimize the sum of the squared residuals (squared distance between actual data points and the prediction (estimation) based on the linear relationship between the variables. This process, given certain assumptions, yields statistically unbiased (best approximation of true relationship), consistent (estimates get closer to true relationship with an increasing number observations), and efficient (distance between actual and predicted values are smallest) estimates for the regression parameters.

====Assumptions====
For OLS to achieve unbiasedness, consistency, and efficiency (among other characteristics), a few assumptions about the regression model must hold. These are listed below with brief descriptions.

*Linearity
**The regression model correctly describes the functional relationship between the given variables. If the relationship is non-linear, some transformation (e.g., log, semilog, translog) of the data is necessary. Other implications of this assumption are that the data represent the variables in the model (i.e., the econometrician knows what he or she is observing), and that the variables are indeed related to each other ("X causes Y").
*No multicollinearity
**The explanatory variables aren't perfectly (or closely) correlated with each other.
*Homoskedasticity
**The variance of the errors are constant across all observations and the covariance between errors is zero (nonautocorrelation).
*Exogeneity
**The explanatory variables are not correlated with the error term. There is no "feedback loop" of causation between the Y and X variables.
*Disturbances have zero mean
**The mean distance between the predicted and actual values is zero.
*Normality
**The errors are normally distributed with mean zero and variance σ2.

==Austrian Criticisms==

===Hans-Hermann Hoppe===
[[MisesWiki:Hoppe|Hans-Hermann Hoppe]] has criticized the widespread use of “mathematical and statistical techniques” and has specifically addressed issues arising from estimating parameters via linear regression analysis. He points out that the way the estimated parameters are interpreted normally would require assumptions that are “inappropriate in the social sciences”. The innocuous and fair interpretation of the estimated parameters would amount to nothing more than “historico-mathematical facts” with “no significance beyond the historical data with respect to which their values were determined”.

His criticism of the inappropriate interpretation of linear regression centers around one fallacious assumption made by modern economists and econometricians: the constancy principle.

<blockquote>Constancy Principle – “the conviction that observable phenomena are in principle determined by causes which are constant and are time-invariant in the way in which they operate, and that in principle contingency plays no part in the way in which causes operate.”</blockquote>

===Roger Garrison===
[[MisesWiki:Roger_Garrison|Garrison]] points out that mathematics is unsuited for the task of identifying cause and effect relations. In an article outlining problems with the mathematical/empirical methodology, he explains:

<blockquote>“The relevant question is: What sort of language—music, mathematics, or, say, English—allows economists best to communicate their ideas? […] And in particular the answer turns—both for Mises and for modern mathematical economists—on whether or not causality in economics is a worthy concern. For Mises causality was the central concern. His methodological individualism has as its goal the establishment of a causal linking of individual actions to observed economic phenomena. The very title of Mises's magnum opus identifies his starting point. Human action is the root cause of all economic phenomena.”</blockquote>

And, like Hoppe, Garrison describes what the innocuous, but appropriate, interpretation of regression analysis results should be and how mainstream econometricians simply do not stop there, but make further assumptions to make inappropriate conclusions and interpretations.

“Systems of equations can be suitably employed to describe the consequences of human action, but such mathematical descriptions are inherently blind to notions of intentionality and causality.”

He also sees a disconnect between what the textbooks say and what the econometricians do.

<blockquote>“All respectable texts on statistics and econometrics acknowledge that statistical inference can never identify cause and effect; they warn against interpreting correlation as causation.”

But,

“In recent years it has become acceptable within the economics profession to ignore all such acknowledgments and warnings and to make claims about cause and effect on the basis of empirical tests. For a hypothetical example, the claim that a rising interest rate causes the wage rate to fall may be supported by time-series analysis in which an inverse relationship between wage rates and lagged interest rates is demonstrated. The long-respected strictures against reading causality into statistical patterns are flouted. Empirical causality tests are increasingly common in the professional literature.”</blockquote>

2012-06-19T14:36:13Z

Jrnewman: Created page with "Econometrics is a major field in contemporary mainstream/empirical economic research. It involves the use of statistical tools to analyze numerical data, estimate relationshi..."

File:Olsbasics.jpeg

2012-06-19T14:31:03Z

Jrnewman: Simple Google drawing of the components of linear regression, by Jonathan Newman. No "intellectual property" claimed or implied.

== Summary ==
Simple Google drawing of the components of linear regression, by Jonathan Newman. No "intellectual property" claimed or implied.
== Licensing ==
{{Public domain}}

Hayekian triangle

2010-11-16T00:33:17Z

Jrnewman:

[[File:Hayekian triangle.jpg|right|thumb|Hayekian triangle|300px]]
The '''Hayekian triangle''' is a diagram first presented in [[Friedrich Hayek]]'s ''[[Prices and Production]]'' (1935) <ref>F. A. Hayek. [http://www.mises.org/books/pricesproduction.pdf "Prices and Production"] View page 39 for Hayek's presentation and exposition of the triangle.</ref> that organizes all spending in an [[economy]] in the shape of a triangle. It depicts [[production]] in stages, early (higher-order) to late (lower-order), ending with the final consumer good. [[Time]] is a significant factor and is represented vertically. In more recent replications and uses, the triangle has been turned 90 degrees counter-clockwise, so that time is represented horizontally, left to right.<ref>Roger Garrison. [http://www.auburn.edu/~garriro/cbm.htm "Chapter 9: The Austrian School: Capital-Based Macroeconomics"]</ref> This helps when juxtaposing the triangle's concept with other relevant diagrams, especially a production possibilities frontier of societal consumption and investment.

Early stages of production include the very first processes involved in producing a good, such as mining, harvesting, and other ways to collect natural resources. Late stages include the "final touches", distribution, and putting the item on the shelf for sale, so to speak. The very bottom (or rightmost, depending on how the triangle is oriented) depicts consumption, or money spent on consumer goods.

The shape and size of the triangle depends on how an economy allocates resources in consumption and investment. Here, interest rates are key. If a society decreases current consumption and saves more, real interest rates are lowered. With lower interest rates, entrepreneurs have more incentive to invest in earlier stages of production for two reasons: (1) consumers are spending less on retail goods, and (2) lower interest rates mean entrepreneurs can borrow more money, cheaper, for investment. This causes Hayek's triangle to expand vertically and become more narrow (in the original orientation), with the earlier stages receiving more funding and with less spending on the lowest-order goods. This primes the economy for even more opportunities for consumption in the future than was possible without the initial decrease in consumption that began the whole process. When this happens, the whole triangle becomes larger, with more opportunity to invest in production ''and'' spend on final goods.

If, however, the ''opposite'' occurs, and consumers increase spending on the final, lower-order goods, and society saves ''less'', then interest rates are increased and less investment occurs in the earlier stages of production. This causes the triangle to become shorter and fatter, with less resources going toward production and more resources going toward consumption. A society that engages in this tradeoff sacrifices current investment and future consumption.

The triangle is distorted when interest rates are controlled by a central bank. A central bank can put downward pressure on interest rates by increasing the money supply whether or not society is saving more and consuming less. When this happens, the triangle loses its straight hypotenuse. Early stages of production expand, making the diagram taller, and the bottom of the diagram (consumption) also increases in size. This distortion in the economy is represented by a distorted hypotenuse (usually depicted as bowing inward), instead of an overall increase in the size of the triangle. This major societal malinvestment eventually causes the whole triangle to shrink, because resources were not being allocated through a real, market-dictated interest rate and society as a whole is now less able to save and less able to spend. This is, in essence, the basis of [[Austrian Business Cycle Theory]]. The Hayekian triangle therefore helps depict the main components of ABCT.

==References==
{{reflist}}

[[Category:Economic concepts]]

{{stub}}

File:Hayekian triangle.jpg

2010-11-16T00:16:05Z

Jrnewman: /* Summary */

== Summary ==
Hayekian triangle depicting the early to late stages of production.
Recreated by Jonathan Newman. He neither claims nor assumes any intellectual "property" associated with this image.

== Licensing ==
{{Other license}}

2010-11-15T20:36:45Z

Jrnewman: Page creation - Jonathan Newman

== Hayekian triangle ==

First presented in [[Friedrich Hayek]]'s [[Prices and Production]] (1935), the diagram organizes all spending in an [[economy]] in the shape of a triangle. It depicts [[production]] in stages, early (higher-order) to late (lower-order), ending with the final consumer good. [[Time]] is a significant factor and is represented vertically. In more recent replications and uses, the triangle has been turned 90 degrees counter-clockwise, so that time is represented horizontally, left to right. This helps when juxtaposing the triangle's concept with other relevant diagrams, especially a production possibilities frontier of societal consumption and investment.

Early stages of production include the very first processes involved in producing a good, such as mining, harvesting, and other ways to collect natural resources. Late stages include the "final touches", distribution, and putting the item on the shelf for sale, so to speak. The very bottom (or rightmost, depending on how the triangle is oriented) depicts consumption, or money spent on consumer goods.

The shape and size of the triangle depends on how an economy allocates resources in consumption and investment. Here, interest rates are key. If a society decreases current consumption and decides to save more, real interest rates are lowered. With lower interest rates, entrepreneurs have more incentive to invest in earlier stages of production for two reasons: (1) consumers are spending less on retail goods, and (2) lower interest rates mean entrepreneurs can borrow more money, cheaper, for investment. This causes Hayek's triangle to expand vertically and become more narrow (in the original orientation), with the earlier stages receiving more funding and with less spending on the lowest-order goods. This primes the economy for even more opportunities for consumption in the future than was possible without the initial decrease in consumption that began the whole process. When this happens, the whole triangle becomes larger, with more opportunity to invest in production ''and'' spend on final goods.

If, however, the ''opposite'' occurs, and consumers increase spending on the final, lower-order goods, and society saves ''less'', then interest rates are increased and less investment occurs in the earlier stages of production. This causes the triangle to become shorter and fatter, with less resources going toward production and more resources going toward consumption. A society that engages in this tradeoff sacrifices current investment and future consumption.

The triangle is distorted when interest rates are controlled by a central bank. A central bank can put downward pressure on interest rates by increasing the money supply whether or not society is saving more and consuming less. When this happens, the triangle loses its straight hypotenuse. Early stages of production expand, making the diagram taller, and the bottom of the diagram (consumption) also increases in size. This distortion in the economy is represented by a distorted hypotenuse (usually depicted as bowing inward), instead of an overall increase in the size of the triangle. This major societal malinvestment eventually causes the whole triangle to shrink, because resources were not being allocated through a real, market-dictated interest rate and society as a whole is now less able to save and less able to spend. This is, in essence, the basis of Austrian Business Cycle Theory. The Hayekian triangle therefore helps depict the main components of ABCT.

[[File:Hayekian triangle.jpg]]

File:Hayekian triangle.jpg

2010-11-15T19:31:58Z

Jrnewman: Hayekian triangle depicting the early to late stages of production.

== Summary ==
Hayekian triangle depicting the early to late stages of production.
== Licensing ==
{{Other license}}