(Frisch, Tinbergen, Klein, Stone, Havelmo, Heckman, Mcfadden, Engle, Granger and Sims)
Samuelson, Koopmans and Stone, in a report about the Journal, Econometrica, have said: “Econometrics may be defined as the Quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference”. In his well-known Text- Book, An Introduction to Econometrics, Klein observed, “Econometrics is a branch of Economics in which measurement of the relationships discussed in apriory Economic analysis is studied”. Econometric theory mainly deals with establishing statistical properties of estimators and the development of tests, while applied econometrics uses statistical methods to test and evaluate economic theories, and to forecast future values of the variables. When the Nobel Prize in Economics was first introduced in 1969, it was awarded to the pioneers in Econometrics, Ragnar Frisch and Jan Tinbergen.
Frisch first coined the term Econometrics and he had made rich contributions to Multi-Colliniarity problems in Econometrics. The term Multi-colliniarity is used by Frisch in his book on Statistical Confluence Analysis. The term refers to the existence of perfect or an exact linear relationship among some or all-explanatory variables in a Regression model. Today the term Multi-Colliniarity is used in a broad sense to include the case of perfect Multi-Colliniarity as well as the case where the explanatory variables are inter-correlated but not perfectly.
It refers to the tendency of many economic series to move together overtime. Economic theory of Demand tells us that relative prices and income are the explanatory variables in Demand function. However, the Statistician will not be able to isolate their separate contributions if they move together in a Time-series sample.
If there is Multi-Colliniarity among explanatory variables, the standard errors of the estimated parameters will be large. Frisch devised his Confluence Analysis to tackle such problems.
Tinbergen
Tinbergen’s significant contributions relate to the analysis of Business Cycles. His Statistical Testing of Business Cycle Theories is a landmark in that area of Research. Tinbergen formulated the first macro econometric model, Business Cycles in the United States of America, 1919-32. Another notable contribution of Tinbergen relates to designing Development Policy for National economy. For evaluating Government’s policies, Tinbergen has suggested instrument target approach. According to Tinbergen, there are four main economic variables, which a policy maker has to take into account. They are the targets, or objectives of economic policy, instruments available to achieve the targets, non-controllable variables and irrelevant or neutral variables. He advocates that the Government should use policy instruments in such a way as to achieve the desired levels of the Target variables as closely as possible despite the fact that the time paths of the Target variables are strongly influenced by factors which are, for the policy maker, non-controllable.
Klein
Like Tinbergen, who wrote an excellent introductory book on Econometrics, Klein too wrote one elementary but excellent book on Introduction to Econometrics. Besides, Klein wrote earlier an advanced book titled, Text Book of Econometrics. Both the books of Klein are well received and read by Students of Econometrics all over the world. Also, Klein is well known for his Doctoral Dissertation on Keynesian Revolution. The thesis, with some additions, is published.
Klein is a Macro-Econometric model builder. An econometrician first specifies the Economic model. Then, the next task of the econometrician is to obtain estimates of the parameters of the model for the data. If the predictions of the model are consistent with empirical evidence, he accepts the theory; otherwise, he reformulates the theory or proposes new one. Klein built a Model for the American economy.
Richard Stone
Stone’s work relates to Statistical Demand analysis. He estimated Elascities of demand for a wide variety of products in U.K.Price Elasticity of demand (own price) is measured by percentage change in quantity demanded divided by percentage change in the price of the same commodity. Cross Elasticity of demand refers to the percentage change in quantity demanded of a commodity in response to the percent age change in the price of another related commodity. Percentage change in quantity demanded of the commodity divided by percentage in Income is known as Income-Elasticity of demand.
Havelmo
Havelmo, who worked earlier as Research Assistant with Ragnar Frisch, won the Nobel Prize in 1989 for his valuable contributions to Probability approach in Econometrics. Another area in which Havelmo did valuable Research relates to a system of Simultaneous equations. In the Simultaneous equations approach the particular equation being studied is considered as a part of a relationships describing the simultaneous interactions of the relevant variables. Havelmo devised a statistical method of reduced form equations to estimate the parameters of the system of Simultaneous equations.
Heckman and McFadden
James Heckman and Daniel McFadden were awarded the Nobel prize in Economics in 2000. While giving that prize, the Swedish Academy said: “The micro econometric methods developed by Heckman and McFadden are now part of the standard too-kit, not only of economists but also of other Social Scientists”.
Social Scientists make generalizations about the whole Populations on the basis of Samples. If the samples are selected randomly, the generalizations made are likely to be close to truth. However, Heckman argues that often these Samples are not random, people self-select themselves into these Samples and this leads to bias in results. For instance, in the case of man-=power training programs, Heckman’s Research shows that often those employees who are keen on improving their performance will join the Training program; others will not. Even without training, these who have joined the programme would have performed better than those who did not. This leads to bias in conclusion. Heckman tackled such selection bias problems.
McFadden also conducted Research on micro-units and their decisions. McFadden worked on problems of discrete decisions and developed Statistical methods for discrete choice analysis. This method is known as “conditional Logit method, which is applied for making many discrete policy choices. This method can help to calculate how probable it is that a person of certain age, income and education would choose to travel by bus, Sub-way or car, taking into account costs and journey time. His method is used widely in tackling, urban transport problems and Telephone services.
Engle and Granger.
Engle and Granger shared the Nobel prize in 2003 for their statistical contributions to economic Time Series. Engle contributions are in areas such as Auto-Regressive Conditional Heteroscedasticity (ARCH), co-integration and band-spectrum regression. Granger’s contributions are mainly to spectral Analysis of Time-Series.
Granger’s researches are contained in his book, Forecasting Economic Time Series. (Academic Press, New York)
SIMS
Sims developed Vector Auto-Regression (VAR) method. He popularized the Granger-Sims casuality tests to analyse time-series data. The tests are often used to describe the joint behavior of a variable X will Granger cause variable Y, if the set of correlations between the current innovations in Y and lagged innovations in X is significant. (Sims 1972 AER-62).
Since suggested alternative style of identification of equations and models to that of existing large scale models of the economy prevalent during 1970-80’s. In a path breaking article on macro economics and reality (1977), since discussed the simultaneous equation identification problem and issues involved in constructing macro economic models of an economy for both descriptive and forecasting purposes. His article can be downloaded from the internet. (Discussion paper No: 77-91, Dec 1977 University of Minnesota).