Econometric Model

ECONOMETRIC MODELS

Description of the technique
An econometric model is one of the tools economists use to forecast future developments in the economy. In the simplest terms, econometriciansmeasure past relationships among such variables as consumer spending, household income, tax rates, interest rates, employment, and the like, and then try to forecast how changes in some variables willaffect the future course of others.
An econometric model is one of a range of tools used to replicate and simulate the main mechanisms of a regional, national or international economic system.Econometric models are generally defined by the use that data play in informing the model structure, namely to calculate the model’s coefficients through a variety of possible estimation methods. In mostmodels that use the label “econometric”, there is usually a mixture of those coefficients estimated freely by the data, and those which are fixed, assumed or restricted, due to some limitations on dataquantity or quality. These restrictions or assumptions can often be made according to economic theory, or sometimes use results from other datasets where the economic mechanisms are expected toperform in similar ways.
A large number of such models exist, largely because very few are actually built specifically with the aim of evaluation in mind. More often an existing model, previously builtfor some other purpose, is adapted as an evaluation tool as a least-cost option because it would take too many resources to construct a model from scratch. The models are adapted in order to simulate acounterfactual situation, and thus to quantitatively evaluate net effects on most of the macro-economic variables influenced by public actions, eg growth, employment, investment, trade, etc.Economists commonly employ such calculations in the process of providing advice to businesses and units of government. The practical validity of such applications depends on how well the model’s structure...