Chapter 2: CHERISHED BELIEFS AND T-STATISTICS.

The article presents information on how economic models are estimated. Economic models are attempts to quantify the relationships identified by economic theory by using statistical techniques, such as regression analysis, to examine the relationships between different measures of economic activity. The chapter analyses the sociology of economic modeling by introducing some of the key concepts and techniques which economists use to understand the economy. The ISLM model is the theoretical starting point for almost all macroeconometric models and provides a way of analysing the effects of monetary and fiscal policies on aggregate demand. The basic methodology for hypothesis testing in econometrics is to specify some sort of restriction on the regression equation, re-estimate it and see if the coefficients have the appropriate test statistics. The purpose of working through the estimation of a single equation has been to highlight the various points at which decisions must be made, and the ways in which these decisions can be negotiated.