Statistical vs. Economic Significance in Economics and Econometrics: Further Comments on Mccloskey & Ziliak

Journal of Economic Methodology, Vol. 16, No. 4, pp. 393-408, 2009

26 Pages Posted: 4 May 2009 Last revised: 14 May 2011

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Date Written: May 4, 2009

Abstract

I comment on the controversy between McCloskey & Ziliak and Hoover & Siegler on statistical versus economic significance, in the March 2008 issue of the Journal of Economic Methodology. I argue that while McCloskey & Ziliak are right in emphasizing ’real error’, i.e. non-sampling error that cannot be eliminated through specification testing, they fail to acknowledge those areas in economics, e.g. rational expectations macroeconomics and asset pricing, where researchers clearly distinguish between statistical and economic significance and where statistical testing plays a relatively minor role in model evaluation. In these areas models are treated as inherently misspecified and, consequently, are evaluated empirically by other methods than statistical tests. I also criticise McCloskey & Ziliak for their strong focus on the size of parameter estimates while neglecting the important question of how to obtain reliable estimates, and I argue that significance tests are useful tools in those cases where a statistical model serves as input in the quantification of an economic model. Finally, I provide a specific example from economics - asset return predictability - where the distinction between statistical and economic significance is well appreciated, but which also shows how statistical tests have contributed to our substantive economic understanding.

Keywords: Statistical and economic significance, statistical hypothesis testing, model evaluation, misspecified models

JEL Classification: B41, C10, C12

Suggested Citation

Engsted, Tom, Statistical vs. Economic Significance in Economics and Econometrics: Further Comments on Mccloskey & Ziliak (May 4, 2009). Journal of Economic Methodology, Vol. 16, No. 4, pp. 393-408, 2009. Available at SSRN: https://ssrn.com/abstract=1398723

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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