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.