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the quantitative analysis of actual economic phenomena

A daunting task

Certain features of economic data make it challenging for economists to quantify economic models. Unlike researchers in the physical sciences, econometricians are rarely able to conduct controlled experiments in which only one variable is changed and the response of the subject to that change is measured. Instead, econometricians estimate economic relationships using data generated by a complex system of related equations, in which all variables may change at the same time. That raises the question of whether there is even enough information in the data to identify the unknowns in the model.

Econometrics can be divided into theoretical and applied components.

Theoretical econometricians investigate the properties of existing statistical tests and procedures for estimating unknowns in the model. They also seek to develop new statistical procedures that are valid (or robust) despite the peculiarities of economic data—such as their tendency to change simultaneously. Theoretical econometrics relies heavily on mathematics, theoretical statistics, and numerical methods to prove that the new procedures have the ability to draw correct inferences.

Applied econometricians, by contrast, use econometric techniques developed by the theorists to translate qualitative economic statements into quantitative ones. Because applied econometricians are closer to the data, they often run into—and alert their theoretical counterparts to—data attributes that lead to problems with existing estimation techniques. For example, the econometrician might discover that the variance of the data (how much individual values in a series differ from the overall average) is changing over time.