Chapter Summary:
Most of the economic series are time trended, in other words, value of the variable change over the time. And then, when we see the relationship between two different times trended variables, then the result also evolve over the time. There is a tendency to believe in the past findings, for example, Okun’s law states that there is negative and significant relationship between GDP growth rate and unemployment rate. It is also possible that to make the assumption about the behaviour of a particular variable, for example, inflation and interest rate are mean convergent.
As economic environment is changing over the time, and it seems that literature is also evolve over the time too. In other words, those relationship sets in past are no more reliable in current economic environment, such as, Okun’s law. In this chapter authors suggest the approach is to test statistical relationships between variables of interest using econometric techniques and the most recent dataset instead of making assumptions of about the relationships.
Statistical software’s enables analysts to use major econometric techniques to characterize a variable and/or to quantify a statistical relationship between variables to of interest. Without learning to tedious maths, analysts can employ these statistical tools to perform the required tests. Users must be aware, however, that statistical software produces results without considering the type of input dataset, it is an analyst’s job to make sure the input dataset fulfills economic/financial theory and matches the statistical properties of the underlying tests.