Chapter 16 Monte carlo experimentation in econometrics

At the outset, it is useful to distinguish Monte Carlo methods from distribution sampling even though their application in econometrics may seem rather similar. The former is a general approach whereby mathematical problems of an analytical nature, which prove technically intractable, can be solved by substituting an equivalent stochastic problem and solving the latter. In contrast, distribution sampling is used to evaluate features of a statistical distribution by representing it numerically and drawing observations from that numerical distribution. The chapter investigates the distribution of the mean of random samples of T observations from a distribution that was uniform between zero and unity, one could simply draw a large number of samples of that size from a set of one million evenly spaced numbers in the interval and plot the resulting distribution. Such a procedure is invariably part of a Monte Carlo experiment.