xii Editors’ Introduction
made when combining economics and econometrics in order to carry out serious
empirical research.
As in the case of Volume 1, the chapters here have been specially commissioned
from acknowledged experts in their fields; further, each of the chapters has been
reviewed by the editors, one or more of the associate editors and a referee. Thus,
the process is akin to submission to a journal; however, whilst ensuring the highest
standards in the evaluation process, the chapters have been conceived of as part
of a whole rather than as a set of unrelated contributions. It has not, however,
been our intention to provide just a series of surveys or overviews of some areas of
applied econometrics, although the survey element is directly or indirectly served
in part here. By its very nature, this volume is about econometrics as it is applied
and, to succeed in its aim, the contributions, conceived as a whole, have to meet
this goal.
We have organized the chapters of this volume of theHandbookinto ten parts.
The parts are certainly not watertight, but serve as a useful initial organization of
the central themes. Part I contains three chapters under the general heading of
“The Methodology and Philosophy of Applied Econometrics.” The lead chapter is
by David Hendry, who has been making path-breaking contributions in theoretical
and applied econometrics for some forty years or so. It is difficult to conceive how
econometrics would have developed without David’s many contributions. This
chapter first places the role of applied econometrics in an historical context and
then develops a theory of applied econometrics. As might be expected, the key
issues are confronted head-on.
In introducing the first volume we noted that the “growth in econometrics is to
be welcomed, for it indicates the vitality and importance of the subject. Indeed,
this growth and, arguably, the dominance over the last ten or twenty years of
econometric developments in taking economics forward, is a notable change from
the situation faced by the subject some twenty-five years or so ago.” Yet in Chapter
1, Hendry notes that, next to data measurement, collection and preparation, on the
one hand, and teaching, on the other, “Applied Econometrics” does not have a high
credibility in the profession. Indeed, whilst courses in theoretical econometrics or
econometric techniques are de rigueur for a good undergraduate or Masters degree,
courses in applied econometrics have no such general status.
The intricacies, possibly even alchemy (Hendry, 1980), surrounding the mix of
techniques and data seem to defy systematization; perhaps they should be kept
out of the gaze of querulous students, who may – indeed should – be satisfied with
illustrative examples! Often to an undergraduate or Masters student undertaking a
project, applied econometrics is the application of econometrics to data, no more,
no less, with some relief if the results are at all plausible. Yet, in contrast, leading
journals, for example, theJournal of Econometrics, theJournal of Applied Economet-
ricsand theJournal of Business and Economic Statistics, and leading topic journals,
such as theJournal of Monetary Economics, all publish applied econometric articles
having substance and longevity in their impact and which serve to change the
direction of the development of econometric theory (for a famous example, see
Nelson and Plosser, 1982). To some, applying econometrics seems unsystematic