Econometrics is the application of statistical and mathematical theories to economics for the purpose of testing hypotheses and forecasting future trends. The first known use of the term econometrics was by Polish economist Paweł Ciompa in 1910. Ragnar Frisch is credited with coining the term in the sense in which it is used today.
Econometrics is the intersection of economics, mathematics, and statistics. It takes economic models and tests them through statistical trials. The results are then compared and contrasted against real-life examples, like to study the hypothesis that
as a person's income increases, spending increases.
Econometrics is also closely related to quantitative analysis (finance). So, it comes at no surprise that they share many tools, like:
- simple and multiple regression analysis
- frequency distributions
- probability and probability distributions
- statistical inference
- simultaneous equations models
- time series methods
There have been many criticisms of econometrics' usefulness as a discipline and perceived widespread methodological shortcomings in econometric modelling practices:
- The Lucas critique argues that it is naive to try to forecast entirely on the basis of relationships observed in historical data, because economic structure and behaviour is subject to change.
- Austrian School of economics entirely rejects the validity of econometrics as a method of predicting human behaviour, preferring to use the deductive method.