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American Economic Review Papers Proceedings 2008 98 2 251 255 http www aeaweb org articles php doi 10 1257 aer 98 2 251 Allowing the Data to Speak Freely The Macroeconometrics of the Cointegrated Vector Autoregression By Kevin D Hoover S ren Johansen and Katarina Juselius an initial condition 1the height of the tower2 determines the distance the ball falls for each time in theory Of course no object conforms perfectly to the gravity law If one had a generous enough notion of approximation if the ball were steel and the initial height were not too high then tight bounds of approximation would work but not if the ball were styrofoam Now there are three choices A2 declare that theory is no good B2 modify the original theory to account for the factors such as air resistance or C2 attempt to assess empirically the combined forces that must be used to adjust the gravity law to its application in the particular case In economics as in physics the difficulty is that our theory holds ceteris paribus When other things are not equal there is always some residual left unexplained which if large may render the theory empirically irrelevant As scientists we can either attempt to elaborate the theory in such a way that fewer and fewer ceteris paribus conditions are invoked B2 or we can attempt to provide an adequate empirical characterization of the factors that determine the initial gap between theory and data 1C2 Strategy C can be seen as the passive analogue to a controlled experiment 1 cf Haavelmo 1944 esp chaps 1 and 22 It has an advantage over B in the sense of providing clues as to how the theory needs to be developed clues that would be helpful in strategy B but for which strategy B itself offers no internal resources What is more strategy C gives some hope of actually isolating the action of the gravity law and therefore in fact testing whether it is a contributing factor to a successful account of the data It is only when we can control for enough of the complicating



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