Econometrics and its consequences for human beings..
Marco Fioramanti and Robert Waldmann have a timely post cautioning on the huge usage of econometrics in policy. If one is not careful, then chances of being conned and taking bad policy decisions could be huge.
The post is technical and authors could have simplified the post for a better reading:
The European Commission is currently evaluating compliance with the Stability and Growth Pact across the Eurozone. However, differences in the econometric methods used by member states and by the Commission can lead to estimates that are at odds. This column argues that the Commission’s method of estimating the non-accelerating wage rate of unemployment for Eurozone members, which relies on an accelerationist Phillips curve, is inferior to specifications with a traditional Phillips curve. The findings highlight how technical aspects of an estimation procedure can have serious effects on policy outcomes.
The basic idea is how different econometric models produce different results. They show analysis for Italy:
The difference in the structural balance calculated by the European Commission and the Italian authority can easily be produced by tweaking the second or third decimal point of variance bounds imposed on the stochastic processes driving the NAWRU. Do we really want these technical aspects of an estimation procedure – the uncertainty of which is huge and cannot be removed given the unobservability of the underlying phenomenon – to be the key element on which we base our decision on Italy’s fiscal strategy in a time when a still high unemployment rate and humanitarian emergencies require the support of government’s actions?
One should be very careful with usage of econometrics and even more while giving policy reccomendations based on the models. The assumptions and limitations should be clearly specified.