A Guide to Modern Econometrics
Chapter One
Introduction
1.1 About Econometrics
Economists are frequently interested in relationships between different quantities, for
example between individual wages and the level of schooling. The most important job
of econometrics is to quantify these relationships on the basis of available data and
using statistical techniques, and to interpret, use or exploit the resulting outcomes appropriately.
Consequently, econometrics is the interaction of economic theory, observed
data and statistical methods. It is the interaction of these three that makes econometrics
interesting, challenging and, perhaps, difficult. In the words of a seminar speaker,
several years ago: 'Econometrics is much easier without data'.
Traditionally econometrics has focused upon aggregate economic relationships.
Macro-economic models consisting of several up to many hundreds equations were
specified, estimated and used for policy evaluation and forecasting. The recent
theoretical developments in this area, most importantly the concept of cointegration,
have generated increased attention to the modelling of macro-economic relationships
and their dynamics, although typically focusing on particular aspects of the economy.
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