What is Econometrics?
Quantitative methods in economics and finance
Econometrics is a set of quantitative techniques that are useful for
making "economic decisions". Economic decisions are not restricted to
those made by economists. Any decision that affects the allocation of
scarce resources is an economic decision. Some examples are:
- The decision of a student to stay an extra year at university to earn
a double degree;
- The decision of a green-grocer to open shop in Balwyn instead of Clayton;
- The decision of a bank to approve a loan application;
- The decision of a power company to start-up an extra generator on
a certain day;
- The decision of Virgin Airlines to enter the Australian domestic air
travel market;
- The decision of the Australian Government to introduce the GST in
order to reduce income taxes.
In the above examples, a student, a small-businessperson, a bank officer,
an engineer, Richard Branson and a politician are respectively the ultimate
decision-makers. However, to make good decisions, they may ask for expert
support, and econometricians should be able to provide that support.
What is old and what is new?
The "efficient allocation of resources" is the subject matter of economics.
The traditional role of econometricians is to "test" alternative economic
theories, that is, to confront theories with real data and to reject those
that are not compatible with reality. This was, and still is, a very important
function, one that occupies most of the research time of the majority
of academic econometricians. It is what transformed economics from an
"art" into a "science". However, it only gave the econometrician an indirect
role as an economist's sidekick. If economists didn't come up with new
theories, econometricians didn't have anything to do!
Regardless of what economists do, economic problems persist in reality.
Decisions have to be made. The modern role of an econometrician is therefore
more direct. Econometricians extract information from the available data
in order to provide support for an economic decision. The raw material
that the econometrician uses is more often real observed data, instead
of economic theory. Of course, in any specific problem if an economic
theory that has been validated by data exists, it will certainly be used.
If no such model exists, however, the econometrician still has to make
a statistical model for the data, and provide intelligent support for
the decision process.
Econometrics at Monash
Our goal in the Department is to train econometricians who are ready
for their modern role as "economic decision support specialists". Being
within a strong Faculty of Business and Economics, we have a unique opportunity
to fulfil this goal. The observation of one of our recent PhD graduates,
who was recruited last year by an international firm, summarises our position
today. Attending an orientation camp in the USA with other new recruits
who were mostly from top North American universities, he said: "I knew
as much econometrics as (the) others, but I was the only one who knew
some accounting as well".
The blend of practical skills provided by the Department and the Faculty
is our comparative advantage relative to other institutions in the world.
We offer a first year sequence in business and economic statistics, and
second and third year courses in practical econometrics, applied forecasting
for business and economics, actuarial statistics, business modelling,
marketing research analysis, time-series analysis and financial econometrics.
Our courses are constantly reviewed to keep them attuned to the ever-changing
needs of business, industry and government.
To see what some of our former students say about their experiences,
click here.
