Chapter 2 Statistical theory and econometrics

Research in statistical theory has yielded useful procedures for learning from data one of the principal objectives of econometrics and science. This research has produced a large number of probability models for observations that are widely utilized in econometrics and other sciences, which are reviewed in the chapter. This chapter also reviews techniques for estimation, prediction, and testing that enable investigators to solve inference problems in a scientific manner. The importance of utilizing sound, scientific methods in analyzing data, and drawing conclusions from them is obvious, because such conclusions often have crucial implications for economic policy making and the progress of economic science. On the other hand, it is a fact that statistical and econometric analysis frequently is a mixture of science and art. A challenge for statistical theory is to provide fruitful, formal procedures that are helpful in solving model formulation problems. The two major approaches to statistical inference discussed in this chapter are the sampling theory approach and the Bayesian approach. Among several controversies, there is controversy regarding the implications of the likelihood principle for econometric and statistical practice.