Why Has Econometric Inference Been Possible?

Abstract

In economics and finance, test statistics and confidence regions are typically probabilistically dependent on previously-used data. However, the Bayesian and classical justifications for usual tests and confidence regions are known to be invalid in this case. Given the success of empirical econometrics, this leads to the question: Why has econometric inference been possible? The paper provides a simple, yet general, answer to the question. We outline a novel econometric theory that i) is immune to conditioning on previously-used data, and that ii) nests model calibration, and most of econometric practices, whether they are labelled Bayesian or classical.

Keywords: Data mining; Specification search; Effect of model selection on inference; Hypothesis testing; Confidence region; Estimation; Model calibration; Classical inference; Bayesian inference; Empirical Bayes

JEL Classification: C1