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March/April 1993, 
Vol. 75, No. 2
Posted 1993-03-01

Assessing Applied Econometric Results

by Carl F. Christ

Part I of the article defines the concept of an ideal econometric model and argues that to tell whether a model is ideal, we must test it against new data—data that were not available when the model was formulated. Such testing suggests that econometric models are not ideal, but are approximations to a changing reality. Part I closes with a list of desirable properties that we can realistically seek in econometric models. Part II is a loosely connected set of comments and criticisms about several econometric techniques. Part III discusses methods of evaluating econometric models by means of their forecasts and summarizes some results of such evaluations. Part IV resurrects an old, plain-vanilla equation relating monetary velocity to an interest rate and tests it with more recent data. The rather remarkable result is that it still does about as well today as it did nearly 40 years ago.