Sir Clive Granger

Evaluating Economic Theories and Models


Abstract

It is insufficient to merely present an economic theory or imperial model, however well founded it may appear, without asking if it is relevant, useful, and better than alternatives.

For an economist, the most satisfactory way of approaching the evaluation question is to consider it from this perspective: will a decision maker, when using the model or theory, make better decisions? This can be illustrated in practice by considering forecasts or financial investments.

The purpose for the model should always be clearly stated for the evaluation process. “Explaining Stylized Facts” can only be a partial and purely statistical rather than economic, objective measure of success and may be misleading. Evaluation is insufficiently emphasized in most economic texts and economic science can be weaker for it.


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