Some comments on the role of econometrics in economic theory

Martin Eichenbaum is a professor of economics at Northwestern University and a senior consultant to the Federal Reserve Bank of Chicago. In this article, I offer some comments on the role of econometrics in macroeconomics. 1 These reflect a specific perspective: The role of econometrics ought to be the advancement of empirically plausible economic theory. This is a natural perspective for any economist to take, but it is one that is particularly compelling for a macroeconomist. Lucas' (1976) critique of econometric policy evaluation aside, it seems obvious that most policy questions cannot be fruitfully addressed using traditional quasi-reduced form econometric models. In the end, there are no alternatives to the use of fully specified general equilibrium models for addressing many of the problems that interest macroeconomists. The real issue is: Different fully specified general equilibrium models can generate very different answers to the same question. Indeed it is possible to work backwards from any answer to some model. So given a particular question, which model should a macroecono-mist use? Developing the tools to answer this question is the key challenge facing econome-tricians. Because all models are wrong along some dimension, the classic Haavelmo (1944) program of testing whether models are " true " will not be useful in meeting this challenge. 2 We do not need high-powered econometrics to tell us that models are false. We know that. What we need to know are the dimensions along which a given model does well and the dimensions along which it does poorly. In Leamer's (1978) terminology, we need a workable version of " specimetrics " that is applicable to dynamic general equilibrium models. 3 Developing the diagnostic tools for this specimetrics program ought to be the primary occupation of econometricians, not developing ever-increasingly sophisticated tools for implementing the Haavelmo program. The need for progress on this front is pressing. General equilibrium business cycle analysts have begun to move beyond their initial practice of assessing models on a small set of moments without a formal statistical methodology. 4 Real business cycle (RBC) theory is evolving to accommodate a wide variety of impulses to the business cycle, including shocks to fiscal and monetary policy. But the process is in its infancy. The ultimate success of the enterprise will depend on the willingness of econometricians to devote more energy to the development of diagnostic tools for structural models and less to the development of …